- USD/CAD edges lower US Dollar corrects downward on Monday.
- US Treasury Secretary Scott Bessent is scheduled to meet with Chinese officials on Monday.
- The upbeat sentiment from the potential US-China trade talks eased concerns about the US-Canada tariff war.
USD/CAD retraces its gains from the previous session, trading around 1.3680 during the Asian hours on Monday. The pair edges lower as the US Dollar (USD) corrects downward after registering approximately 0.50% gains on Friday following United States (US) jobs data for May. The stronger-than-expected data raised the chances that the Federal Reserve (Fed) will keep its benchmark interest rate unchanged at its next two monetary policy meetings.
The US Bureau of Labor Statistics (BLS) reported that US Nonfarm Payrolls (NFP) climbed by 139,000 in May compared to April’s 147,000 increase (revised from 177,000). This reading came in above the market consensus of 130,000. Moreover, the Unemployment Rate held steady at 4.2% and the Average Hourly Earnings remained unchanged at 3.9%, both readings came in stronger than the market expectation.
The US Dollar may gain ground amid easing trade-war jitters. US President Donald Trump and China’s Xi Jinping spoke and agreed on Thursday that officials from both sides would soon resume trade negotiations aimed at ending the trade war. US Treasury Secretary Scott Bessent and two other Trump administration officials are set to meet with Chinese officials on Monday.
The positive sentiment surrounding the US-China trade talks also weakens concerns that US steel and aluminum tariffs would choke Canadian exports. Last week, Trump signed an executive order to double, from 25% to 50%, steel and aluminum tariffs. Prime Minister Mark Carney called the tariffs “unlawful and unjustified.” Carney emphasized that the government is engaged in intensive and live negotiations to have these and other tariffs removed as part of a new economic and security partnership with the United States.
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.