- USD/CAD gains to near 1.4260 due to underperformance by the Canadian Dollar.
- Weak Canadian labor market data has prompted BoC dovish bets.
- Trump’s tariffs have exposed the US economy to a recession.
The USD/CAD pair rises to near 1.4260 during North American trading hours on Monday. The Loonie pair gains as the Canadian Dollar (CAD) faces selling pressure amid growing expectations that the Bank of Canada (BoC) could continue reducing interest rates this year.
A fresh escalation in BoC dovish bets has been prompted by weak employment data for March, released on Friday. Statistics Canada reported that the workforce saw a reduction of 32.6K workers, while economists expected the economy to have added 12K new job-seekers. The Unemployment Rate accelerated to 6.7%, as expected. Additionally, Average Hourly Wages decelerated at a faster pace to 3.5%. Such a scenario boosts the need for further monetary policy easing by the BoC.
Meanwhile, the US Dollar (USD) strives to gain ground after remaining significantly volatile in the last few trading sessions. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers its intraday losses and flattens to near 103.00.
However, the outlook of the US Dollar remains uncertain as the imposition of reciprocal tariffs by United States (US) President Donald Trump has dampened the domestic outlook. Financial market participants have become increasingly confident that Trump's tariffs could lead to an economic recession as their impact will be majorly borne by US importers.
On Friday, Federal Reserve (Fed) Chair Jerome Powell also warned that protectionist policies by US President Trump could result in a resurgence in inflation and slower economic growth.
This week, investors will focus on the US Consumer Price Index (CPI) and Producer Price Index (PPI) data for March, which will be released on Thursday and Friday, respectively.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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