- USD/CAD posts modest gains around 1.4375 in Friday’s early Asian session.
- Trump said he wanted the Fed to lower interest rates immediately.
- Canada’s Retail Sales were flat in November, weaker than expected.
The USD/CAD pair trades with mild gains near 1.4375 during the early Asian session on Friday. Investors await further clarity on tariff announcements by US President Donald Trump. Later on Friday, the flash US S&P Global Manufacturing and Services Purchasing Managers Index (PMI) for January will be in the spotlight.
Late Thursday, Trump said he wants the US Federal Reserve (Fed) to cut interest rates “immediately,” adding that he understands monetary policy better than those charged with setting it. Trump’s remarks came before the Fed’s monetary policy meeting scheduled for January 28 and 29, with expectations the US central bank will hold rates steady.
“I think Trump’s comments at the World Economic Forum today helped euro-dollar recover and put some pressure on the (U.S.) dollar more broadly,” said Silver Gold Bull Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull.
On the Loonie front, Canada’s Retail Sales were flat on a monthly basis in November versus 0.6% prior, Statistics Canada reported on Thursday. This reading came in weaker than the 0.2% expected.
Meanwhile, a fall in crude oil prices might exert some selling pressure on the commodity-linked Canadian Dollar (CAD) and cap the downside for the pair. Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative 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.
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