- USD/CAD meets with a fresh supply on Friday and is pressured by a combination of factors.
- US fiscal concerns, US-China trade tensions, and dovish Fed expectations weigh on the USD.
- Reduced bets for a June BoC rate cut underpin the CAD and exert pressure on spot prices.
The USD/CAD pair attracts fresh sellers following the previous day’s brief pause and slides to the 1.3825 area during the Asian session on Friday. Spot prices remain close to a two-week low touched on Wednesday and seem vulnerable to weaken further amid a broadly weaker US Dollar (USD).
Traders ramped up their bets for further interest rate cuts by the Federal Reserve (Fed) following last week’s softer US Consumer Price Index (CPI) and the Producer Price Index (PPI). Adding to this concerns that US President Donald Trump’s dubbed “Big, Beautiful Bill” would worsen the budget deficit at a faster pace failed to assist the USD in building on Thursday’s mostly upbeat US data-inspired gains. This, in turn, is seen as a key factor exerting some downward pressure on the USD/CAD pair.
Meanwhile, Crude Oil prices stall this week’s retracement slide from a nearly one-month peak as the uncertainty over US-Iran nuclear talks eases oversupply concerns fueled by reports that OPEC+ is discussing a production increase for July. Adding to this, diminishing odds for a Bank of Canada (BoC) interest rate cut in June, bolstered by hotter Canadian core inflation figures released on Tuesday, underpin the commodity-linked Loonie and contribute to the USD/CAD pair’s downfall.
The aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains on the downside. Even from a technical perspective, this week’s breakdown through a short-term trading range support near the 1.3900 mark validates the near-term negative outlook for the USD/CAD pair and supports prospects for a further depreciating move. Traders now look to Canadian monthly Retail Sales figures and New Home Sales data from the US for a fresh impetus.
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.
