USD/CAD weakens below 1.4200 as investors brace for US Retail Sales data
- USD/CAD softens to around 1.4195 in Thursday’s late American session.
- Trump revealed a new tariff plan.
- The potential for a long trade war and uncertainty could weigh on the CAD.
The USD/CAD pair edges lower to a two-month low near 1.4195 during the late American session on Thursday, pressured by a decline in US bond yields and the weaker US Dollar (USD). Traders will keep an eye on the US Retail Sales for January, which are due later on Thursday.
On Thursday, US President Donald Trump signed a presidential memorandum laying out his plan to impose “reciprocal tariffs” on every country that charges duties on U.S. imports. The reciprocal tariffs join the 10% tariff that went into effect last week on top of other tariffs on Chinese goods and 25% tariffs on steel and aluminum that Trump announced on Monday.
"Today's move lower in U.S. yields has weakened the USD across the board, thereby allowing CAD to post gains," said George Davis, chief technical strategist at RBC Capital Markets.
On the other hand, the potential for a long trade war with the United States and the uncertainty could exert some selling pressure on the Loonie. The Bank of Canada (BoC) released a summary of its deliberations on Wednesday, saying that the threat of tariffs had increased uncertainty and would weigh on business confidence and consumer sentiment. “This also supported the case for a lower policy rate,” said the report.
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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