USD/CAD softens to near 1.3900 on caution over US economy
- USD/CAD weakens to around 1.3910 in Wednesday’s early Asian session.
- The US Dollar declines as caution reigns over the US economy.
- A rise in Crude oil prices lifts the commodity-linked Loonie.
The USD/CAD pair extended its decline to near 1.3910 during the early Asian session on Wednesday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) amid renewed concerns over the US economy. Traders will keep an eye on the speech from the Federal Reserve’s (Fed) Thomas I. Barkin later on Wednesday.
The Greenback remains under selling pressure after last Friday’s downgrade of the US sovereign rating by Moody’s on deficit concerns. The downgrade underscores growing concerns over fiscal deterioration and tariff-induced distortions under US President Donald Trump.
“The Moody’s downgrade was the catalyst earlier, pushing yields higher and the dollar lower. Now yields have come off those highs and the dollar is still lower,” said Vassili Serebriakov, currency strategist at UBS in New York.
Meanwhile, none of the Fed officials has opened the door for cutting interest rates amid an ongoing economic slowdown in the US. On Monday, the Atlanta Fed’s Raphael Bostic said that he favors one cut in 2025.
Crude Oil prices rise after CNN cites unnamed US officials saying Israel is planning an attack on Iranian nuclear facilities. This, in turn, boosts the commodity-linked Loonie and creates a headwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
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.