- USD/CAD depreciated as US President Donald Trump called on the Fed to cut interest rates immediately.
- US Dollar Struggles as US Treasury Yields Lose Ground Following Trump’s Comments.
- The commodity-linked CAD receives upside support from improving crude oil prices.
USD/CAD extends its losses for the second day in a row, trading around 1.4330 during early European hours on Friday. This drop in the USD/CAD pair is attributed to the weakness of the US Dollar amid a risk-on sentiment following US President Donald Trump’s recent comments on Thursday night.
Trump said he wants the US Federal Reserve (Fed) to cut interest rates immediately. “With oil prices going down, I will demand that interest rates go down immediately, and they should be going down around the world,” Trump said at the World Economic Forum in Davos, Switzerland.
The US Dollar Index (DXY), which measures the performance of the US dollar against six major currencies, continues to decline as US Treasury yields lose ground following Trump’s comments. The DXY has fallen below 107.00, with the 2-year and 10-year US Treasury yields sitting at 4.26% and 4.63%, respectively, at the time of writing.
Traders will likely monitor the release of the preliminary US S&P Global Purchasing Managers’ Index (PMI) and the Michigan Consumer Sentiment Index for January.
The commodity-linked Canadian Dollar (CAD) receives upside support from improving crude oil prices. The West Texas Intermediate (WTI) oil price halts its six-day losing streak, trading around $74.50 per barrel at the time of writing.
However, crude oil prices are headed for a weekly decline after US President Donald Trump issued a broad plan to increase US production and called on OPEC to Oil Exporters) to lower crude oil prices.
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.
