- USD/CAD edges higher to around 1.4305 in Wednesday’s late American session.
- BoC Meeting Minutes showed policymakers await more signs of tariff inflation.
- The US CPI came in hotter than expected in January.
The USD/CAD pair trades on a stronger note near 1.4305 during the late American session on Wednesday. The fall in crude oil prices exerts some selling pressure on the commodity-linked Canadian Dollar (CAD). Later on Thursday, traders will keep an eye on the US weekly Initial Jobless Claims and Producer Price Index (PPI).
The Bank of Canada (BoC) released its latest Meeting Minutes on Wednesday. The BoC governing council noted that retaliatory measures by Canada and other nations would put upward pressure on inflation. The Canadian central bank governing council added that increased uncertainty due to the US tariff threat also supported the case for a cut. The BoC emphasized that even if no tariffs were imposed, a long period of uncertainty would almost certainly damage business investment.
Meanwhile, crude oil prices edge tumbles on the day as US President Donald Trump called Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskiy to discuss ending the war in Ukraine. This, in turn, drags the commodity-linked Loonie lower and creates a tailwind for USD/CAD. 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.
Wednesday’s data showed the Consumer Price Index (CPI) grew by more than expected at the start of the year. The so-called core CPI, which excludes food and energy costs, increased 0.4% MoM in January versus 0.2% prior, the largest rise since March 2024. Following the new data, traders expected just one quarter-point rate cut this year, down from two reductions before the CPI report.
Federal Reserve (Fed) Chair Jerome Powell said the recent inflation data showed that while the central bank has made substantial progress toward taming inflation, there is still more work to do. The cautious stance of the US central bank is likely to support the Greenback in the near term.
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.
