USD/CAD moves below 1.4350 as Trump asks Fed to cut interest rates
- USD/CAD depreciated as US President Donald Trump asked the Fed to reduce interest rates immediately.
- The US Dollar struggles as US Treasury yields lose ground following Trump's comments.
- The commodity-linked CAD receives upward support from the improvement in crude Oil prices.
USD/CAD extends its losses for the second consecutive day, trading around 1.4330 during the early European hours on Friday. This downside of the USD/CAD pair is attributed to the weaker US Dollar amid risk-on sentiment following recent remarks from US President Donald Trump late Thursday.
Trump said he wants the US Federal Reserve (Fed) to cut interest rates immediately. "With oil prices going down, I'll demand that interest rates drop immediately, and likewise they should be dropping all over the world," said Trump at the World Economic Forum in Davos, Switzerland.
The US Dollar Index (DXY), which measures the US Dollar's performance against six major currencies, continues to decline as US Treasury yields lose ground following Trump's comments. The DXY has fallen below 107.00, with the 2-year and 10-year US Treasury yields standing at 4.26% and 4.63%, respectively, at the time of writing.
Traders will likely monitor the release of the preliminary US S&P Global Purchasing Managers Index (PMI) and the Michigan Consumer Sentiment Index for January.
The commodity-linked Canadian Dollar (CAD) receives upward support from improved crude Oil prices. West Texas Intermediate (WTI) Oil price halts its six-day losing streak, trading around $74.50 per barrel at the time of writing.
However, crude Oil prices are headed for a weekly decline after US President Donald Trump issued a sweeping plan to boost US production and demanded OPEC (Organization of the Petroleum Exporting Countries) lower crude prices.
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.