USD/CAD posts modest losses below 1.3650 ahead of US PCE, Canadian GDP releases
- USD/CAD trades in negative territory around 1.3640 in Friday’s early Asian session.
- US President Trump attacked and threatened Fed credibility, undermining the US Dollar.
- Traders brace for the US May PCE inflation and Canadian April GDP data, which are due later on Friday.
The USD/CAD pair trades with mild losses near 1.3640 during the early Asian session on Friday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) amid growing market concerns about the Federal Reserve's (Fed) independence. The US May Personal Consumption Expenditures (PCE) - Price Index and Canadian April Gross Domestic Product (GDP) data will be the highlights later on Friday.
According to a Wall Street Journal, US President Donald Trump is considering replacing Fed Chair Jerome Powell before his term ends in May. Trump has been encouraging the Fed Chair to lower interest rates faster. “Such an appointment by Trump of a shadow Fed chair will likely shake investor confidence in the central bank's independence, which is helping to contribute to the dollar's weakness”, said Wasif Latif, chief investment officer at Sarmaya Partners in New Jersey.
Fed Chair Jerome Powell said on Wednesday that the central bank would be careful in considering further rate cuts as it expects Trump's tariffs would cause prices to rise this summer. Fed officials still expect to reduce interest rates this year, but the timing remains uncertain as policymakers wait on coming trade deadlines and hope for more certainty about the scope of the tariffs.
Meanwhile, a fall in Crude Oil prices could drag the commodity-linked Loonie lower and cap the downside for the pair. 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.