- USD/CAD marks a new multi-year high of 1.4239 on Friday.
- The US dollar gains ground due to tariff threats from the Trump administration.
- The commodity-linked CAD faces challenges due to lower WTI oil prices.
USD/CAD extends its gains for the second consecutive session, hitting a new multi-year high of 1.4239 during Asian trading hours on Friday, the highest level since April 2020. This rise could be attributed to the administration’s tariff threats of Trump, which have boosted the US Dollar (USD) across the board and created a headwind for risk-sensitive currencies like the Canadian Dollar (CAD).
Additionally, the commodity-linked Canadian Dollar might have faced challenges due to lower crude oil prices as Canada is the largest exporter of crude oil to the United States (US). The West Texas Intermediate (WTI) crude oil price remains tepid for the second consecutive session, trading around $69.70 per barrel at the time of writing.
However, the Canadian dollar could limit its decline as the Bank of Canada (BoC) signaled a slower pace of future interest rate cuts following its recent decision on Wednesday. BoC Governor Tiff Macklem stated: “We anticipate a more gradual approach to monetary policy if the economy generally evolves as expected.” Macklem also highlighted “great new uncertainty” arising from potential US tariffs under President-elect Donald Trump.
In the United States, the release of the stronger-than-expected US Producer Price Index (PPI) report on Thursday provided support to the US Dollar. The US PPI rose 0.4% monthly in November, the biggest increase since June, after an upwardly revised 0.3% increase in October. This reading was better than the 0.2% expected.
Traders await the US Federal Reserve (Fed) interest rate decision scheduled for next week. Financial markets are fully pricing in a 25 basis point rate cut on December 18, according to the CME’s FedWatch tool.
The Canadian Dollar FAQs
The key factors that determine the price of the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export product, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the risk-on being positive for the CAD. 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) exerts significant influence over the Canadian Dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are usually positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian Dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD also rises, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.
The published macroeconomic data measures the health of the economy and may have an impact on the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can 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 raise interest rates, resulting in a stronger currency. However, if economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
