Canadian Dollar declines to near 1.3750 as Trump

Canadian Dollar declines to near 1.3750 as Trump–Xi summit supports US Dollar

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The USD/CAD pair gathers strength to around 1.3755 during the early European trading hours on Friday. The pair is set for its largest weekly gain in more than two months, as rising energy prices stoked inflationary pressures, boosting expectations of a ‌Federal Reserve (Fed) rate hike this year.

USD/CAD strengthens near 1.3755 in Friday’s early European session.
Traders await more details about Trump's second and final day of talks with Chinese President Xi Jinping in Beijing.
BoC feels it could be patient on rates, minutes showed.

Traders will closely monitor the second day of a high-stakes summit between US President Donald Trump and Chinese counterpart Xi Jinping in Beijing. Talks will focus on the leaders' shared desire to reopen the Strait of Hormuz, which Iran has effectively shut since the war began late in February.

US President Donald Trump said that he had struck “fantastic trade deals” with Chinese President Xi Jinping as he wrapped up his Beijing visit on Friday. On Iran, Trump said, "We’ve settled a lot of different problems that other people wouldn’t have been able to solve.”

Earlier Thursday, Trump stated that China’s leader Xi Jinping had offered to help negotiate an end to the war with Iran and keep the Strait of Hormuz open to global shipping. Nonetheless, a cautious mood in the markets continues to boost a safe-haven currency such as the US Dollar (USD) against the Canadian Dollar (CAD).

Hotter-than-expected US inflation data have reinforced a "higher-for-longer" US interest rate outlook. Markets are now pricing in nearly a 36.9% chance that the US central bank will raise the interest rate by at least 25 basis points (bps) at the December meeting, up from 22.5% a week ago, according to the CME FedWatch tool.

The Bank of Canada (BoC) meeting minutes released on Wednesday revealed the Governing Council sees it has scope to be patient. Policymakers chose to "look through" a recent headline inflation spike driven by global energy shocks. BoC Governor Tiff Macklem stated that future policy adjustments will likely be small, but the direction is not predetermined.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.