- USD/CAD gains momentum to around 1.3975 in Tuesday’s early Asian session.
- Easing trade tensions between the US and China lifts the US Dollar.
- Higher crude oil prices might boost the Loonie and cap the pair’s upside.
The USD/CAD pair extends the rally to around 1.3975 during the early Asian session on Tuesday, bolstered by a stronger US Dollar (USD). The Canadian Dollar (CAD) marked its weakest point since April 10 against the Greenback since April 10 after a US-China trade deal gave the American currency a boost.
The easing of trade tensions between the world’s two largest economies gives investors their clearest indication yet that US President Donald Trump is taking a softer approach than expected. This raises hope that the US economy can avoid a recession, which, in turn, lifts the US dollar broadly.
“Continued strength in the DXY (U.S. dollar index) is expected to keep the loonie under pressure in the next trading session,” said Karim Francis, head of currency risk management, North America, at Convera Canada ULC.
Investors now expect the US Federal Reserve (Fed) to cut its interest rates just twice in 2025. Swaps tied to Fed meetings now favor a 25 basis points (bps) reduction in September. Last week, they indicated three cuts this year, with a change likely as soon as July.
Meanwhile, a rise in Crude Oil prices could underpin the commodity-linked Loonie and cap the upside for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive 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.
