USD/CAD extends its losses for the second successive session, trading around 1.4030 during the Asian hours on Thursday. The pair depreciates as the US Dollar (USD) struggles amid market caution, driven by the escalating United States (US)-China trade tensions, the world’s two largest economies.
US President Donald Trump said on Wednesday that he saw the US as in a trade war with China, even as Treasury Secretary Scott Bessent proposed a longer pause on high tariffs on Chinese goods to resolve a conflict over critical minerals.
The Greenback also faced challenges after US Federal Reserve (Fed) Chair Jerome Powell stated on Tuesday that the central bank is on track to deliver another quarter-point interest-rate reduction later this month, even as a government shutdown significantly reduces its read on the economy. Powell highlighted the low pace of hiring and noted that it may weaken further. The CME FedWatch Tool indicates that markets are now pricing in nearly a 98% chance of a Fed rate cut in October and a 93% possibility of another reduction in December.
The downside of the USD/CAD pair could also be attributed to the positive sentiment surrounding the Oil prices, which provides support for the commodity-linked Canadian Dollar (CAD). It is worth noting that Canada is the largest Oil exporter to the United States (US).
West Texas Intermediate (WTI) Oil price trades around $58.30 per barrel at the time of writing. Crude Oil prices may gain ground as US President Donald Trump announced that Indian Prime Minister Narendra Modi had pledged his country would stop buying Russian Oil, per 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.