- USD/CAD could be further increased due to fresh tariffs from US President Donald Trump.
- The latest FOMC meeting minutes emphasized that more time is needed to assess multiple factors before considering any adjustments.
- The Bank of Canada may rethink its approach to policy easing after inflation data showed an upward trend in January.
USD/CAD will remain stable after two consecutive days of profits, trading around 1.4230 during Asian hours on Thursday. The advantages of the pair stem from concerns about tariffs from US President Donald Trump. President Donald Trump confirmed that a 25% tariff on drug and semiconductor imports will take effect in April. Additionally, Trump reaffirmed that tariffs on automobiles remained at 25%, further increasing global trade tensions.
Market participants are currently focusing on key US economic data, including weekly early unemployment claims scheduled to be released during the North American session, the CB major economic index, and the Philadelphia Fed manufacturing index.
The minutes of the Federal Open Market Committee (FOMC) meeting of the January policy meeting, published Wednesday, reaffirmed its decision not to change interest rates in January. Policymakers emphasized that more time is needed to assess economic activity, labor market trends and inflation before considering any fee adjustments. The committee also agreed that clear indications of a decline in inflation are needed before implementing interest rate cuts.
The Bank of Canada (BOC) could rethink its easing policy after inflation data showed an increase in January, data showed on Tuesday. CPI inflation in Canada's headlines rose to 1.9% year-on-year, collaborating with forecasts, up from the past 1.8%. Meanwhile, core BOC CPI inflation accelerated to 2.1% year-on-year, up from 1.8%, marking the fastest pace in nearly a year.
After the release of CPI, the market expectations for a 25 base point rate reduction at the BOC's March 12 policy meeting fell below 30%. “There is too much underlying inflationary pressure in Canada to ensure that central banks targeting inflation will further ease monetary policy,” writes Derek Holt of Scottiabank.
Canadian Dollar FAQ
The key factors driving the Canadian Dollar (CAD) are the Bank of Canada (BOC), the prices of Canada's largest exports, economic health, inflation and interest rate levels set by the balance of trade. The difference in the value of Canada's exports and imports. Other factors include whether the risk-on is CAD-positive, whether the investor is taking on a more risky asset (risk-on) or seeking a safe haven (risk-off). It includes market sentiment. As our biggest trading partner, the health of the US economy is also an important factor affecting the Canadian dollar.
Bank of Canada (BOC) has a major impact on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the interest rate level for everyone. The main goal of the BOC is to keep inflation at 1-3% by adjusting interest rates up and down. A relatively high interest rate tends to be positive for CAD. Bank of Canada can also use quantitative mitigation and tightening to influence credit terms along with previous CAD negatives and the latter CAD positives.
Oil prices are an important factor that influences the value of the Canadian dollar. As oil is Canada's largest export, oil prices tend to have an immediate impact on CAD values. Generally, as aggregate demand for a currency increases, if oil prices rise, so does CAD. If oil prices drop, the opposite is true. Rising oil prices also tend to increase the likelihood of a positive trade balance in favor of CAD.
Inflation was traditionally considered a negative factor in currency, but in reality it was opposed in modern times with the relaxation of capital controls across borders, as it reduces the value of money. The higher the inflation rate, the more likely it will lead central banks to raise interest rates, which will increase capital inflows from global investors seeking a favorable place to keep money. This increases the demand for local currency, which is Canadian dollars, in Canada.
Macroeconomic data assesses economic health and may affect Canadian dollars. Indicators such as GDP, Manufacturing and Services PMI, Employment, and Consumer Sentiment Survey can all affect the direction of CAD. A strong economy is good for the Canadian dollar. Not only will it attract more foreign investment, it may also encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is weak, CAD can drop.
