USD/CAD moves above 1.3850, upside seems restrained due to improved Oil prices
- USD/CAD gains support following hawkish remarks from Federal Reserve Chair Jerome Powell.
- CME FedWatch Tool suggested that traders are now anticipating the first rate cut in July.
- The commodity-linked CAD may find support from stronger crude Oil prices.
USD/CAD halts its two days of losses, trading around 1.3860 during the Asian hours. However, market activity is expected to remain subdued due to the Good Friday holiday. The US Dollar found support from hawkish comments by Federal Reserve Chair Jerome Powell, who warned that persistent inflation and a slowing economy could threaten the Fed’s dual mandate, raising the risk of stagflation.
Market sentiment took another hit after President Trump criticized Fed Chair Powell’s recent remarks. However, the CME FedWatch Tool suggested that traders are now pricing in approximately 86 basis points of rate cuts by the end of 2025, with the first cut anticipated in July.
On the data front, the US Department of Labor (DOL) reported that Initial Jobless Claims dropped to 215,000 for the week ending April 12, beating forecasts and down from a revised 224,000. However, Continuing Claims rose by 41,000 to 1.885 million for the week ending April 5.
Gains in the USD/CAD pair may be capped as the commodity-linked Canadian Dollar (CAD) could find support from stronger crude Oil prices. Oil rallied after the US imposed new sanctions on Iranian exports, sparking concerns over tighter global supply. Meanwhile, uncertainty lingers over potential US tariffs on key commodities including copper, semiconductors, pharmaceuticals, and lumber.
The Bank of Canada (BoC) warned that a spike in inflation driven by a potential Trump-era global trade war could plunge the economy into a “deep recession.” While it refrained from issuing an updated forecast, the BoC outlined two potential scenarios reflecting the uncertainty surrounding future US tariff policy and its impact on Canada’s outlook.
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.