- The US Dollar crawls higher amid Canadian Dollar weakness and reaches fresh two-week highs above 1.3850.
- Downbeat data from Canada has offset the negative impact of rising Fed easing bets.
- US Nonfarm Payrolls have been revised sharply lower, adding pressure on the Fed to accelerate its easing cycle.
The US Dollar is trading higher for the second consecutive day against the Canadian Dollar. The pair has returned to levels beyond 1.3850 on Wednesday, as the weaker outlook of Canada’s economy offset the impact of Fed easing expectations.
The US Dollar Index appreciated nearly 1% from its lows at 1.3725 earlier this month, as Canada’s economy begins to show the negative impact of higher US tariffs. Data released last week revealed an unexpected decline in net employment that pushed the Unemployment rate to a four-year high.
Weak Canada’s data, low Crude prices hurt the CAD
Along the same lines, Canada’s Ivey PMI dropped from a healthy 55.8 level in July to the brink of stagnation, at 50.1 in August, pointing to a sharp slowdown in economic activity.
Beyond that, Oil prices, Canada’s main export, remain close to multi-month lows, weighed by news of a further output hike, albeit a more moderate one than in previous months, and increasing concerns about a decline in global demand. This is another key factor behind the Canadian Dollar’s weakness.
US Dollar upside attempts, however, have remained subdued, with traders raising their bets for Fed easing. The sharp downward revision of US Nonfarm Payrolls figures in the 12 months before March has cemented those hopes, and the market awaits upcoming US inflation data to assess the extent of next week’s rate cut.
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.
Source: https://www.fxstreet.com/news/usd-cad-ticks-up-above-13850-with-all-eyes-on-the-us-ppi-report-202509101140
