- USD/CAD is trading in negative territory around 1.4395 in the Asian session on Friday.
- Upbeat Canadian PMI and rising crude oil prices support the CAD.
- A slow and cautious approach from the Fed could help limit the pair’s losses.
The USD/CAD pair weakens to near 1.4395 on Friday during Asian trading hours. Rising crude oil prices provide some support to the commodity-linked Canadian Dollar (CAD) against the US Dollar.
Data released by S&P Global on Thursday revealed that the Canadian Manufacturing PMI rose to 52.2 in December from 52.0 in November, its highest level since February 2023. This reading was better than the estimate of 51.9.
Meanwhile, higher crude oil prices are contributing to the CAD’s rise. It should be noted that Canada is the largest exporter of oil to the United States (US), and higher crude oil prices tend to have a positive impact on the value of the CAD.
However, the possible threat of US tariffs and domestic political uncertainty could drag the CAD lower and act as a tailwind for USD/CAD. President-elect Donald Trump said in December that he planned to impose 25% tariffs against Canada and Mexico unless the countries reduce the flow of migrants and fentanyl into the United States.
The Federal Reserve (Fed) reduced the target federal funds rate by 25 basis points (bps) from 4.50%-4.75% to 4.25%-4.50% at the December meeting. However, the signal of slower rate cuts from the Fed this year could boost the US dollar in the short term. At the last policy meeting on Dec. 18, Fed officials projected just two rate cuts in 2025, down from the four they had forecast in September.
Traders will take further clues from the series of US economic data that will give a clear picture of the US economy and some conviction about the Fed’s rate cut this year. The US manufacturing Purchasing Managers’ Index (PMI) for December will be the highlight later on Friday.
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.
