USD/CAD extends downside below 1.3950 on weaker US Dollar
- USD/CAD tumbles to near 1.3920 in Friday’s early Asian session, down 0.41% on the day.
- The economic uncertainty and rising bets of Fed rate cuts drag the US Dollar lower.
- The US CPI inflation eased to 2.4% in March, softer than expected.
The USD/CAD pair extends the decline to around 1.3920 during the early Asian session on Friday. The US Dollar (USD) weakens against the Loonie amid persistent concerns over the global and US economies. Traders brace for the US March Producer Price Index (PPI) and the advanced Michigan Consumer Sentiment, which is due later on Friday.
US President Donald Trump let stand a 10% blanket levy on all imports announced last week and set a 90-day pause on additional US tariffs during which the White House will negotiate the higher tariffs. This encouraged investors to reallocate capital back into Canada, supporting the Canadian Dollar (CAD) against the USD.
Additionally, the Greenback loses traction as US consumer prices unexpectedly fell in March. The US Consumer Price Index (CPI) inflation declined to 2.4% YoY in March from 2.8% in February, according to the US Bureau of Labor Statistics (BLS) on Thursday. This figure came in below the market consensus of 2.6%.
The core CPI, which excludes volatile food and energy prices, increased 2.8% YoY in March versus 3.1% prior and came in below the estimation of 3.0%. On a monthly basis, the headline CPI declined 0.1%, while the core CPI rose 0.1%.
Following the data, traders anticipate that the US Federal Reserve (Fed) will resume cutting interest rates in June and probably reduce its policy rate by a full percentage point by the end of the year.
Meanwhile, a decline in Crude Oil prices could weigh on the commodity-linked Loonie and help limit the pair’s losses. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative 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.