USD/CAD trims losses but remains capped below 1.3735
- The Canadian Dollar is pulling back amid a firmer USD, but remains close to YTD highs.
- Upbeat comments from the White House are fuelling hopes of a positive outcome of the US-China meeting.
- Oil prices’ rally is supporting the Canadian Dollar.
The Canadian Dollar is losing ground for the third consecutive day, with its US counterpart favoured by a moderate optimism about the outcome of the Sino-US trade talks. The pair, however, is struggling to post a significant distance from the 1.3640 year-to-date high reached last week.
The Greenback is showing a mild bullish tone on Tuesday, buoyed by the positive comments by US President Trump regarding the US-China trade talks as representatives from the world’s two major economies meet for a second day, aiming to normalise their trade relationships.
Both countries hac¡ve expressed their will to find a way to reduce reciprocal tariffs that are starting to bite into their respective economies. That, however, will involve concessions in controversial aspects such as rare earths’ trade, restrictions on exports of semiconductors or student visas, which might require time and effort.
Negotiators from the world’s two major economies are trying to ease the recent trade tensions and get back on the track defined last month in Geneva. Those talks led to a significant reduction of their reciprocal tariffs, which was celebrated by the market. The mood is mildly positive today, yet traders are growing cautious about the US Dollar.
In the absence of relevant economic releases from the US or Canada, the steady increase in Oil prices, Canada's main export, is providing some support to the CAD, keeping the pair from rallying further.
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
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
