USD/CAD Jumps Near 1.4400 as Dollar Rises Ahead of Trump Inauguration

  • USD/CAD rises near 1.4400 as the US Dollar gains amid uncertainty over Trump’s return to the White House.
  • The US dollar rises despite weak US retail sales in December and strong growth in initial jobless claims.
  • Investors expect the BoC to reduce the pace of monetary policy tightening.

The USD/CAD pair rises near the key resistance of 1.4400 in the North American session on Thursday. The Loonie pair strengthens as the US Dollar (USD) recovers Wednesday’s losses, with investors turning cautious ahead of President-elect Donald Trump’s inauguration ceremony on January 20.

The Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, rises near 109.25. The US dollar’s safe-haven appeal has improved as investors expect Trump to provide an updated tariff plan soon after returning to the White House. This scenario will boost economic growth and inflation pressures in the United States (US), forcing the Federal Reserve (Fed) to follow a more gradual approach to easing monetary policy.

Meanwhile, traders have accelerated dovish bets on the Fed following the release of US Consumer Price Index (CPI) data for December. The data showed the underlying annual reading grew at a slower pace of 3.2% than estimates and the previous release of 3.3%. Additionally, the monthly core CPI rose as expected by 0.2%, slower than the previous release of 0.3%.

In Thursday’s session, US initial jobless claims data for the week ending January 10 was higher than projected. First-time filers for unemployment benefits were higher, at 217,000 versus estimates of 210,000 and the previous release of 203,000. US retail sales data for December grew moderately by 0.4%, compared to estimates of 0.6% and November’s reading of 0.8%.

The Canadian Dollar (CAD) is performing weakly as investors expect the Bank of Canada (BoC) to continue reducing interest rates. However, market participants expect the BoC to reduce the pace of monetary policy tightening as recent labor market data for December remained upbeat. The Canadian economy added 90.9K workers in December, compared to 50.5K in November.

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

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