USD/CAD trades subduedly above 1.4400 despite US Dollar slides after US data
- USD/CAD trades lower despite a sharp decline in the US Dollar after the US Q4 GDP and Initial Jobless Claims data.
- The US economy rose at a slower pace of 2.3% YoY, compared to estimates and the Q3 reading of 2024.
- BoC Macklem warned that Trump’s tariffs could lead to significant economic damage.
The USD/CAD pair trades in a subdued manner above the key support of 1.4400 in Thursday’s North American session. The Loonie pair is broadly sideways despite the US Dollar (USD) faces a sharp selling pressure after the release of the weak United States (US) Q4 Gross Domestic Product (GDP) data and lower Initial Jobless Claims for the week ending January 24, suggesting a significant weakness in the Canadian Dollar (CAD).
The US Bureau of Economic Analysis (BEA) has reported that the economy expanded at an annualized rate of 2.3%, slower than estimates of 2.6% and the 2.6% growth seen in the third quarter of 2024.
A slower pace in economic expansion is unlikely to boost the Federal Reserve (Fed) significantly as market participants expect US President Donald Trump’s economic policies, such as immigration controls, higher tariffs, and lower taxes, will be pro-growth and inflationary for the economy. A stubborn inflation outlook and strong growth prospects are unlikely to force the Fed to revert to the expansionary policy stance that it followed in the second half of 2024.
On Wednesday, the Fed announced a pause in the policy-easing cycle and left interest rates unchanged at 4.25%- 4.50%. Fed Chair Jerome Powell said the committee is very much in the “mode of waiting “to see what “policies are enacted” and how they will impact the economy.
Meanwhile, the Canadian Dollar (CAD) underperforms. Bank of Canada (BoC) Governor Tiff Macklem expressed concerns about the economic outlook due to the likely US tariffs in the monetary policy announcement on Wednesday, in which the BoC cut interest rates by 25 basis points (bps) to 3%.
"A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada," Macklem said.
The BoC also reduced its growth forecasts for the current year and 2026 to 1.8%, without accounting the impact of likely US tariffs.
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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