USD/CAD remains capped below 1.4200, investors brace for Canadian CPI release
- USD/CAD struggles to gain ground near 1.4175 in Monday’s early Asian session.
- US tariff delays and weaker US Retail Sales data exert some selling pressure on the USD.
- Lower crude oil prices might weigh on the commodity-linked Loonie and create a tailwind for USD/CAD.
The USD/CAD pair remains on the defensive around 1.4175 on Monday during the early European session. The US Dollar (USD) weakens due to the delay in the US President Donald Trump administration's tariff plans and the disappointing US January Retail Sales data. Investors will closely monitor the Canadian Consumer Price Index (CPI) inflation data for January, which is due later on Tuesday.
The weaker-than-expected US Retail Sales undermine the US Dollar (USD) broadly. The downtick in the statistic is likely weighted down by frigid temperatures, wildfires and motor vehicle shortages, suggesting a sharp slowdown in economic growth early in the first quarter.
Additionally, US President Donald Trump approved a proposal for reciprocal tariffs on Thursday but delayed their implementation as his administration conducts one-on-one negotiations with nations that could be impacted. This, in turn, contributes to the USD’s downside. Nonetheless, the rising expectation that the US Federal Reserve (Fed) would stick to its hawkish stance amid elevated inflation might act as a tailwind for the pair.
The decline in crude oil prices to a nearly two-month low amid hopes for a peace deal between Russia and Ukraine might drag the commodity-linked Canadian Dollar (CAD) lower against the Greenback. It's worth noting that Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
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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