- USD/CAD lacks firm intraday direction on Monday amid a combination of diverging factors.
- Fed rate cut bets and concerns about a slowing economy continue to weigh on the Greenback.
- Subdued Crude Oil prices undermine the Loonie and support the pair amid the risk-off mood.
The USD/CAD pair struggles to capitalize on its modest bounce from the monthly low touched last Wednesday and kicks off the new week on a subdued note amid mixed cues. Spot prices, however, hold above the 100-day Simple Moving Average (SMA) pivotal support and currently trade around the 1.4300 mark, nearly unchanged for the day.
The US Dollar (USD) selling bias remains unabated for the third successive day on Monday as the uncertainty over US President Donald Trump’s aggressive trade policies continues to fuel worries about a tariff-driven US economic slowdown. This remains supportive of the growing market acceptance that the Federal Reserve (Fed) could resume its rate-cutting cycle and keep the USD bulls on the defensive, which, in turn, acts as a headwind for the USD/CAD pair.
Meanwhile, the USD bulls largely shrug off signs of rising inflation in the US. In fact, the US Personal Consumption Expenditure (PCE) Price Index showed on Friday that the core gauge that excludes volatile food and energy prices rose 0.4% in February, marking the biggest monthly gain since January 2024 and lifting the yearly rate to 2.8%. Moreover, the University of Michigan’s 12-month inflation expectations soared to the highest level in nearly 2-1/2 years in March.
However, the prevalent risk-off environment, ahead of US President Donald Trump’s reciprocal tariffs due to be announced on Wednesday, helps limit the downside for the safe-haven Greenback. Trump last week rattled markets by imposing a 25% tariff on all non-American cars and light trucks. Adding to this, a report over the weekend said that Trump will consider higher tariffs against a broader range of countries, which will take effect from April 2.
Furthermore, hopes for a Ukraine peace deal keep Crude Oil prices below a multi-week high touched last Wednesday, which further seems to undermine the commodity-linked Loonie and lend some support to the USD/CAD pair. This, in turn, warrants some caution before positioning for the resumption of the currency pair’s recent well-established downtrend from the vicinity of mid-1.4500s, or the monthly swing high touched on March 4.
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.