- USD/CAD depreciates as the Canadian Dollar receives support from expectations of the BoC keeping rates steady on Wednesday.
- The commodity-linked CAD gains ground due to improved crude Oil prices.
- Trump plans to increase import tariffs from 25% to 50% to secure the US steel industry.
USD/CAD extends its losses for the second successive session, trading around 1.3720 during the Asian hours on Monday. The Canadian Dollar (CAD) continues to gain ground against the US Dollar (USD) following stronger-than-expected Gross Domestic Product (GDP) Annualized reinforced odds of the Bank of Canada (BoC) holding interest rates steady at its meeting on Wednesday.
Canada’s economy grew at an annualized rate of 2.2% in the first quarter, surpassing the expected 1.7% growth, driven by a front-loading of exports and business inventories amid rising potential of US tariffs.
Additionally, the rise in crude Oil prices provide support for the commodity-linked CAD, given that Canada is the largest Oil exporter to the United States (US). West Texas Intermediate (WTI) Oil price rises to near $62.00 per barrel at the time of writing. The Oil producer group OPEC+, the Organization of the Petroleum Exporting Countries and its allies, decided to increase output by 411,000 barrels per day (bpd) in July by the same amount for the third successive month. The move came as a relief to markets expecting a larger increase.
The US Dollar Index (DXY), which measures the value of the US Dollar against six major currencies, is holding ground near 99.30 at the time of writing. US ISM Manufacturing Purchasing Managers’ Index (PMI) for May will be eyed later in the North American session.
On Friday, US President Donald Trump noted at a rally in Pennsylvania that he planned to increase import tariffs on steel and aluminum, which may put pressure on global steel producers and intensify the trade war. “We are going to be imposing a 25% increase. We’re going to bring it from 25% to 50% – the tariffs on steel into the United States of America, which will even further secure the steel industry in the United States,” he said, per Reuters.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all 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 put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
