- USD/CAD moves sharply higher on Monday amid a good pick-up in USD demand.
- Expectations of a slower rate cut cycle by the Fed and rebound in US bond yields support the USD.
- Rising oil prices do little to benefit the CAD or impede the pair’s positive intraday move.
The USD/CAD pair regains strong positive traction at the start of a new week and rises towards the 1.4040 area during the Asian session, breaking a three-day losing streak amid a good rebound in demand for the US Dollar (USD ).
US President-elect Donald Trump’s tariff plans could raise consumer prices and set the stage for the Federal Reserve (Fed) to stop cutting rates. This, in turn, triggers a fresh rally in US Treasury yields and helps the USD recover from a near three-week low hit on Friday, which in turn is seen as a key factor that acts as a tailwind for the USD/CAD pair.
In fact, Trump threatened a 100% tariff on the so-called ‘BRICS’ nations – Brazil, Russia, India, China and South Africa. Furthermore, Trump’s promised big tariffs against the United States’ three largest trading partners – Mexico, Canada and China – overshadow a modest rebound in crude oil prices. This, in turn, does little to offer support to the commodity-linked CAD or prevent the USD/CAD pair from moving higher.
The aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the upside, although traders may refrain from opening aggressive bets ahead of this week’s important US macroeconomic data. The US ISM Manufacturing PMI is due out later this Monday and could provide some boost. However, attention is focused on Friday’s crucial Nonfarm Payrolls (NFP) report.
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.
