USD/CAD posts modest gain above 1.3650 on firmer US Dollar
- USD/CAD trades with mild gains near 1.3685 in Thursday’s early Asian session.
- Most Fed officials anticipated that rate cuts would be appropriate later this year, according to the minutes.
- The US weekly Initial Jobless Claims will be the highlight later on Thursday.
The USD/CAD pair posts a modest gain around 1.3685 during the early Asian session on Thursday, bolstered by a firmer US Dollar (USD). Traders will closely monitor negotiations between the United States and its trading partners. The US weekly Initial Jobless Claims is due later on Thursday.
US President Donald Trump unveiled a new round of tariff demand letters on Wednesday, raising concerns about a renewed global trade war. The flood of letters and additional tariff threats represented the latest development in a dizzying trade agenda that has caused volatility in markets. This, in turn, weighs on the riskier assets like the Canadian Dollar (CAD) and creates a tailwind for the pair.
The Minutes from the June 17-18 meeting released on Wednesday indicated that policymakers largely held to a wait-and-see position on future rate moves. The meeting ended with Federal Open Market Committee (FOMC) members voting unanimously to leave the key borrowing rate unchanged in a range between 4.25%-4.50%, where it has been since December 2024. Most participants at the July meeting saw some reduction in the Fed funds rate this year as appropriate, meeting minutes show.
Meanwhile, a recovery in Crude Oil prices could underpin the commodity-linked Loonie in the near term. 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.