USD/CAD holds below 1.3750 on easing Middle East tensions
- USD/CAD posts modest losses around 1.3725 in Wednesday’s early Asian session.
- Fed’s Powell said central bank will continue to wait and see how the economy evolves before deciding whether to cut its rate.
- Canada CPI inflation remained unchanged at 1.7% YoY in May as expected.
The USD/CAD pair trades with mild losses near 1.3725 during the early Asian session on Wednesday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) amid easing Middle East tensions. Investors will keep an eye on Federal Reserve (Fed) Chair Jerome Powell testifies later on Wednesday.
Investors bet that a delicate ceasefire between Israel and Iran will hold. A ceasefire between Iran and Israel begins following four waves of Iranian attacks on Israeli-occupied territories. US President Donald Trump said on Tuesday a ceasefire was now in place and asked both countries not to violate it. Easing tensions in the Middle East and risk-on sentiment could weigh on the Greenback in the near term.
Fed Chair Powell reiterated his stance that policymakers should not hurry to adjust policy, contradicting recent comments from Fed Governors Christopher Waller and Michelle Bowman, who said that the two would be open to lowering rates as soon as July. Money markets have fully priced in two Fed reductions by the end of 2025, with a first move in September far more likely than next month, though expectations of a July reduction rise from last week.
Data released by Statistics Canada on Tuesday showed that the country’s Consumer Price Index (CPI) rose 1.7% on a yearly basis in May versus 1.7% prior. This reading aligned with market expectations. On a monthly basis, the CPI rose 0.6% in May, compared to a 0.1% decline reported in April. This reading surpassed the market expectation of 0.5%.
Meanwhile, the extended decline in Crude Oil prices might undermine the commodity-linked Loonie 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.