- USD/CAD edges lower to near 1.3855 in Tuesday’s early Asian session.
- LeBlanc and Lutnick are set to meet later this week as Canada plans to ease most retaliatory tariffs against the US.
- Rising Fed rate cut bets weigh on the US Dollar.
The USD/CAD pair trades with mild losses around 1.3855 during the early Asian session on Tuesday. The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Canada’s move to ease trade tensions with its largest trading partner. The Conference Board’s Consumer Confidence, Durable Goods Orders and the Richmond Fed Manufacturing Index reports will be released later on Tuesday.
Canada- US Trade Minister Dominic LeBlanc plans to meet with US Commerce Secretary Howard Lutnick in Washington this week. The move comes days after Canadian Prime Minister Mark Carney said that, beginning September 1, the federal government will mirror US tariffs by lifting them on goods that comply with the North American trade pact. However, countermeasures on steel, aluminum, and the auto sector will remain in place. These positive developments could provide some support to the CAD in the near term.
Additionally, extended gains in crude oil prices could lift the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
Rising speculation of a September rate cut by the Federal Reserve (Fed) might drag the Greenback lower. Traders are now pricing in nearly an 84.3% odds for a cut of at least a quarter-point at the Fed’s September meeting, down from 84.7% on Monday, according to the CME FedWatch tool.
Traders will take more cues from the key US economic data released this week, including Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) Price Index data. If the report shows stronger-than-expected growth or any signs of hotter inflation, this might cap the downside for the USD against the CAD.
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.
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