USD/CAD holds below 1.4050 on softer US Dollar
- USD/CAD softens to around 1.4025 in Thursday’s early Asian session.
- US core PCE inflation climbed to 2.8% YoY in October, as expected.
- Trump’s tariff plans on Canadian imports could weigh on the Canadian Dollar.
The USD/CAD pair edges lower to near 1.4025 during the early Asian session on Thursday. The US Dollar Index (DXY) weakens to a multi-day low due to monthly flows and the Thanksgiving Day holiday.
The US Dollar (USD) declines further as traders prefer not to hold positions before a long Thanksgiving weekend. However, the downside for the Greenback might be limited as the US Federal Reserve (Fed) may be cautious about interest rate cuts after stubbornly strong US inflation data.
Data released by the US Bureau of Economic Analysis (BEA) on Wednesday showed that the US Personal Consumption Expenditures (PCE) Price Index rose 2.3% on a yearly basis in October, compared to a 2.1% increase in September.
Meanwhile, the core PCE Price Index, which excludes volatile food and energy prices, climbed 2.8% in the same period, up from 2.7% in September. Both figures came in line with the market consensus. On a monthly basis, the core PCE Price Index increased 0.3% in October, as expected. This report indicated that consumer spending increased solidly in October, but progress on lowering inflation appeared to have stalled.
According to the CME FedWatch Tool, futures traders are now pricing in a 66.5% chance that the Fed will cut rates by a quarter point, up from 55.7% before the PCE data. Nonetheless, they anticipate the Fed leaving rates unchanged at its January and March meetings.
On the Loonie front, the expectation that US President-elect Donald Trump would impose tariffs on Canadian goods during his first stint as US president could exert some selling pressure on the Canadian Dollar (CAD) and act as a tailwind for the pair. On Monday, Trump vowed to introduce 25% tariffs on goods coming from Mexico and Canada and an additional 10% on goods coming from China.
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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