USD/CAD rallies further, approaches 1.3900 on higher levies to Canada
- The Canadian Dollar extends losses against the USD after US President Trump increased tariffs on Canadian products.
- The US Dollar remains buoyed on the back of solid US data and dwindling hopes of Fed cuts.
- The focus today is on the US NFP, which is expected to show a moderate decline in job creation in July.
The US Dollar keeps marching higher, as the Canadian Dollar struggles after Trump decided to increase tariffs to Canada to 35% from the previous 25%, escalating the trading tension with one of its main trading partners.
The US President justified his decision on Canada’s alleged reluctance to cooperate on curbing the traffic of fentanyl and other drugs across the US border. The impact on the Canadian Dollar, however, has been moderate as most Canadian exports are likely to avoid these levies thanks to the USMCA agreement.
Canada's GDP contracts but shows positive signs
In the macroeconomic front, Canada’s Gross Domestic Product data showed that the economy contracted for the second consecutive month in May, in line with the market expectations. Still, manufacturing activity improved significantly, which suggests that the economy might return to growth in June.
In the US, PCE Price Index figures confirmed that price pressures are increasing, which adds reasons to the Federal Reserve to keep interest rates on hold before the real impact of tariffs is clarified. The data provided additional support to the USDollar.
The focus today is on July’s Nonfarm Payrolls report. The market consensus anticipates a slightly lower increase in jobs, 110,000 against the 147,000 seen in June, with the Unemployment Rate increasing to 4.2% from 4.1%. The final reading is likely to determine the direction for US Dollar crosses.
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.