USD/CAD trades with mild losses near 1.4300 as tariff worries ease
- USD/CAD trades with mild negative bias around 1.4315 in Wednesday’s late Amercian session.
- Canada posts its first trade surplus in 10 months in December as exports continue to expand.
- US ISM Services PMI eased to 52.8 in January vs. 54.3 expected.
The USD/CAD pair posts modest losses near 1.4315 during the late American session on Wednesday. The Canadian Dollar (CAD) edges higher as Canada's trade balance shifted into surplus and US President Donald Trump delayed his orders to impose 25% tariffs on Canada for 30 days.
Canada in December reported its first trade surplus in ten months, with exports outpacing imports due to US businesses building up inventory ahead of potential tariffs, supporting the Loonie. Additionally, US tariffs provided relief from the looming trade war threat. Trump on Monday agreed to a 30-day pause on his tariff threats against Mexico and Canada as trading partners took steps to appease his concerns about border security and drug trafficking.
"Tariff worries are easing - for now, at least - which is allowing the CAD to stabilize,” said Shaun Osborne, chief currency strategist at Scotiabank. "Unless trade talks deteriorate significantly again, there is a chance that the USD-CAD peak reached Monday near 1.48 will represent a significant high-water mark for spot,” added Osborne.
Data released by the Institute for Supply Management (ISM) on Wednesday showed that the US Services Purchasing Managers' Index (PMI) declined to 52.8 in January from 54.0 (revised from 54.1) in December. This reading came in weaker than the estimation of 54.3.
The US Dollar (USD) weakens in an immediate reaction to the downbeat US economic data. The US labor market data on Friday will be in the spotlight. In case of the stronger-than-expected outcome, this could boost the Greenback against the CAD 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.