USD/CAD holds below 1.4450 ahead of BoC rate decision
- USD/CAD trades in negative territory near 1.4435 in Monday’s late American session.
- The fears of the US economic slowdown and persistent selloff on Wall Street weigh on the US Dollar.
- The BoC is expected to cut its benchmark rate by 25 bps to 2.75%.
The USD/CAD pair trades with mild losses around 1.4435, snapping the two-day winning streak during the late American session on Monday. Investors worried that tariff policy uncertainty would tip the US economy into a recession, weighing on the US Dollar (USD). Investors brace for the Bank of Canada (BoC) interest rate decision on Wednesday, which is expected to continue its easing campaign.
The probable US economic slowdown and ongoing selloff on Wall Street drag the Greenback lower against the Canadian Dollar (CAD). The weaker-than-expected US February job data suggested that the Federal Reserve (Fed) remained on track to cut interest rates multiple times this year. Traders are now pricing in 75 basis points (bps) of cuts from the Fed this year, LSEG data showed, with a rate cut fully priced in for June.
Investors will closely watch the US Consumer Price Index (CPI) inflation data on Wednesday for fresh impetus. Investors hope for another cooldown in headline CPI inflation, which accelerated in January.
On the other hand, the BoC is anticipated to deliver another quarter-point rate cut at its March meeting on Wednesday while it waits to see how long the dispute with Canada’s largest trading partner lasts. CIBC analysts expect the Canadian central bank to cut 25 bps on Wednesday, lowering its benchmark rate to 2.75%, with more cuts to follow this year if trade uncertainty persists. The rising bets of further BoC rate reductions could undermine the CAD and help limit the pair’s losses.
Meanwhile, a decline in crude oil prices amid tariff uncertainty and rising output from OPEC+ producers might exert some selling pressure on the commodity-linked Loonie. 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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