- USD/CAD weakens to around 1.3675 in Thursday’s early Asian session.
- US ISM Services PMI unexpectedly contracted last month for the first time in nearly a year.
- The Bank of Canada held its key rate steady but said a future cut is possible.
The USD/CAD pair remains under selling pressure around 1.3675 during the early Asian session on Thursday. Weaker US economic data and mounting economic and political uncertainty weigh on the US Dollar (USD) broadly. Later on Thursday, the US Balance of Trade and the weekly Initial Jobless Claims will be released. Also, the Federal Reserve’s (Fed) Adriana Kugler and Patrick T. Harker are set to speak.
The business activity in the US service sector contracted in May, with the Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) declining to 49.9 from 51.6 in April. This reading came in weaker than the market expectation of 52.0. Meanwhile, US ADP private sector employment rose 37,000 in May versus a 60,000 increase (revised from 62,000) recorded in April, missing the market expectation of 115,000 by a wide margin.
Wednesday’s US ISM Services PMI and ADP figures suggested an elevated level of anxiety around the US President Donald Trump administration’s frequently changing trade policy. This, in turn, might exert some selling pressure on the Greenback in the near term.
The Bank of Canada (BoC) decided to hold its key benchmark rate at 2.75% at its June meeting on Wednesday. The decision marked the second time in a row that the BoC has remained on the sidelines after an aggressive rate reduction by 225 basis points (bps) over nine months.
BoC Governor Tiff Macklem said that the trade conflict initiated by the US remains the biggest challenge in the Canadian economy, adding that another cut might be necessary if the economy is weakened in the face of tariffs. Economists expect two or three more rate cuts this year, and the final rate by the end of the year would likely end at around 2%, according to Reuters.
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.