USD/CAD trades with mild positive bias, remains below mid-1.3800s
- USD/CAD attracts some buyers amid a modest USD uptick, though the upside potential seems limited
- Recovering Oil prices underpin the Loonie and cap the pair amid hopes for a US-Canada trade deal.
- Traders also seem reluctant and opt to wait for the crucial FOMC policy decision on Wednesday.
The USD/CAD pair edges higher for the second consecutive day on Tuesday, though it lacks strong follow-through buying and remains confined in a familiar range held over the past two weeks or so. Spot prices currently trade around the 1.3830 region, up less than 0.5% for the day amid a combination of diverging forces.
The US Dollar (USD) gains some positive traction following a two-day losing streak on the back of Monday's upbeat release of the US ISM Services PMI, which, in turn, acts as a tailwind for the USD/CAD pair. However, persistent economic uncertainty led by US President Donald Trump's erratic trade policies hold back the USD bulls from placing aggressive bets.
Meanwhile, Crude Oil prices look to build on the overnight bounce from a nearly one-month low. Adding to this hopes for a US-Canada trade deal underpin the commodity-linked Loonie and contribute to capping the USD/CAD pair. In fact, Trump said that Canadian Prime Minister Mark Carney is looking to make a trade deal and will visit the White House this week.
Investors also seem reluctant and opt to wait for more cues about the Federal Reserve's (Fed) rate-cut path before positioning for the next leg of the directional move for the Greenback and the USD/CAD pair. Hence, the focus will remain on the outcome of the highly-anticipated two-day FOMC monetary policy meeting, scheduled to be announced on Wednesday.
Heading into the key central bank event risk, the incoming US macro data seems to have eased market recession fears. This, in turn, could offer some support to the buck and the USD/CAD pair. Nevertheless, spot prices remain within striking distance of the lowest level since October 2024 touched last Friday, and seem vulnerable to extending a well-established downtrend.
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
