- USD/CAD remains in positive territory around 1.4380 in the early Asian session on Thursday.
- Trump said his administration was considering 25% tariffs on Mexican and Canadian imports, weighing on the CAD.
- Canada’s CPI inflation boosts bets on BoC rate cut in January.
The USD/CAD pair trades with slight gains near 1.4380 during the early Asian session on Thursday. Weekly US initial jobless claims will be in the spotlight on Thursday. Additionally, investors continue to digest the impact of Trump 2.0 ahead of US S&P PMI data for January, due out on Friday.
US President Donald Trump said late Tuesday that he will impose 25% tariffs against Canada and Mexico, as well as tariffs on China and the European Union, on February 1. Trump’s comments drag the Canadian Dollar (CAD) lower as Canada relies heavily on trade with the US, with about 75% of its exports heading south. Analysts at Deutsche Bank said they see the CAD against the dollar as “one of the most undervalued currency crosses for a currency trade war.”
The slowdown in inflation in Canada last month has opened the door for a Bank of Canada (BoC) rate cut in January, contributing to the Loonie’s decline. Data released by Statistics Canada on Tuesday showed the country’s CPI inflation slowed to 1.8% year-on-year in December from 1.9% in November. This reading was slightly lower than the 1.9% expected.
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.
