USD/CAD dips below 1.3900 amid generalised US Dollar weakness
- USD/CAD extends its reversal from 1.3928 to levels right below 1.3900.
- The US Dollar dropped across the board after President Trump threatened EU countries with additional tariffs.
- Canada's consumer inflation figures are likely to set the Canadian Dollar's direction later on Monday.
The US Dollar extends its reversal from Friday’s highs at 1.3928 against the Canadian Dollar, reaching session lows right below 1.3900 on Monday’s European session. US President Donald Trump’s announcement of a new round of trade tariffs is weighing heavily on the Greenback.
Trump jolted markets over the weekend, announcing a new round of trade levies against European countries, in retaliation for their decision to oppose US plans to annex Greenland. European leaders have flagged retaliatory measures, and the US Dollar has dropped across the board on Monday, weighed by renewed concerns about the economic consequences of Trump’s erratic trade policies.
Dollar weakness is offsetting the negative impact of weaker Oil prices, in the commodity-sensitive Canadian Dollar. The US benchmark WTI Oil has retraced previous gains and trades at one-week lows, near $58.70, at the time of writing, more than 5% below last week’s peak at $62.19.
Tensions between the US and Iran have eased as Tehran’s repression of the protests fades in the rearview mirror, and the focus shifts to Greenland. This has eased bullish pressure on Crude prices, and is likely to weigh on the Canadian Dollar’s rallies.
With the US market closed for Martin Luther King Jr. Day, investors will be attentive to the Canadian Consumer Prices Index, which is seen contracting at a 0.3% pace in December, following a 0.1% growth in November, while the year-on-year rate is seen growing at a 2.2% rate, unchanged from the previous month.
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.