- USD/CAD edges lower to 1.4365 in Wednesday’s late American session.
- US CPI rose at the slowest pace in four months in February.
- BoC cut its key interest rate by 25 bps on Wednesday, citing trade uncerainty with the US for the decision.
The USD/CAD pair weakens to near 1.4365 during the late American session on Wednesday. The upside for the Greenback might be limited amid intense tariff uncertainty from US President Donald Trump and fears of a US recession.
US inflation rose at the slowest pace in four months in February. Data released by Labor Statistics on Wednesday showed that the US Consumer Price Index (CPI) increased 0.2% MoM in February after a sharp 0.5% advance in January. This figure came in softer than the expectation of 0.3%. The core CPI, excluding volatile food and energy categories, rose 0.2% MoM during the same period.
This inflation report fueled speculation that the US Federal Reserve (Fe) may cut rates sooner than previously thought. This, in turn, might drag the US Dollar (USD) lower against the Canadian Dollar (CAD) in the near term.
As widely expected, the Bank of Canada (BoC) on Wednesday decided to cut its key interest rate by 25 basis points (bps), bringing it down to 2.75%. This was the BoC’s seventh consecutive interest rate cut. A move that comes just hours after US President Donald Trump issued new steel and aluminum tariffs against Canada.
BoC governor Tiff Macklem said during the press conference, “In recent months, the pervasive uncertainty created by continuously changing U.S. tariff threats has shaken business and consumer confidence.” Tu Nguyen, economist at RSM Canada, said the uncertainty was hurting Canadian growth and another round of tariffs in April could limit the BoC’s options even more. This might exert some selling pressure on the Loonie and help limit the pair’s losses.
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.
Read the full article here