USD/CAD edges higher above 1.3850, BoC holds policy rate at 2.75%
- USD/CAD gathers strength around 1.3880 in Thursday’s Asian session.
- Fed's Powell said US growth appears to be slowing.
- The BoC has paused its streak of seven consecutive rate cuts, holding its rate at 2.75% at the April meeting.
The USD/CAD pair trades in positive territory near 1.3880 during the early Asian session on Thursday. However, the upside for the pad might be limited amid the escalating trade uncertainties. Traders brace for the developments surrounding US trade talks with trading partners.
Federal Reserve (Fed) Chair Jerome Powell said on Wednesday that trade tensions risk undermining the Fed’s employment and inflation targets. Powell further stated that US economic growth appears to be slowing, with consumer spending growing modestly, a rush of imports to avoid tariffs likely to weigh on estimates of Gross Domestic Product (GDP), and sentiment souring. Financial markets expect the US central bank to resume rate cuts in June and that by year-end the policy rate, currently in the 4.25%-4.50% range, will be a full percentage point lower.
Elsewhere, Retail Sales in the United States rose by 1.4% in March, followed by the 0.2% increase seen in February, according to the US Census Bureau on Wednesday. This figure came in better than the estimation of 1.3%. However, the stronger-than-expected data fails to boost the Greenback as traders wait to see if US President Donald Trump’s administration reaches new trading agreements with partners.
The Bank of Canada (BoC) held its benchmark rate at 2.75% at its April meeting on Wednesday, its first pause after seven consecutive cuts. The Canadian central bank said that the uncertainty around US tariffs made it impossible to issue regular economic forecasts. Investors see nearly 50% odds the BoC will return to easing at its next policy decision at the June meeting and expect two further reductions in total by year-end.
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.