- USD/CAD continues to gain ground as Trump’s potential fiscal policies could delay further rate cuts by the Fed.
- The commodity-linked CAD struggles as crude Oil prices extend their losing streak.
- Oil prices decline as proposed tariffs from Trump could dampen demand growth in China.
USD/CAD extends its winning streak for the third consecutive day, trading around 1.3950 during the European session on Tuesday. The US Dollar (USD) continues to gain strength following the confirmation of Trump’s victory in the US election.
Market analysts believe that Trump’s potential fiscal policies could stimulate investment, spending, and labor demand, potentially heightening inflation risks. This could lead the Federal Reserve (Fed) to adopt a more hawkish monetary policy, further supporting the US Dollar and the USD/CAD pair.
On Sunday, Minneapolis Fed President Neel Kashkari remarked that the US economy has demonstrated impressive resilience as the Fed works to control inflation. However, Kashkari emphasized that the Fed is “not all the way home” and will need additional evidence to ensure inflation fully returns to the 2% target before considering another rate cut.
The commodity-linked Canadian Dollar (CAD) receives downward pressure from lower crude Oil prices, given the fact that Canada is the largest Oil exporter to the United States (US). West Texas Intermediate (WTI) Oil price trades around $67.90 at the time of writing. Crude Oil prices extend losses amid the fears that a Trump administration will spark a tariff-led trade war and concerns about demand growth in China.
Traders will likely focus on the Canadian September Building Permits later in the North American session. Attention will then turn to the US inflation data set for release on Wednesday, which could provide key insights into future US monetary policy.
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.
