USD/CAD stays below 1.3950 due to potential widening of US-Canada yield spread
- USD/CAD weakened as April’s Consumer Price Index data missed expectations, triggering a shift in market sentiment.
- Headline US CPI increased by 2.3% year-over-year in April, down from 2.4% in March and below forecasts.
- IPSOS Consumer Confidence Index dropped to 47.70 in April from 48.20 in March, marking its lowest level since July 2024.
USD/CAD remains subdued for the second consecutive session, hovering near 1.3930 during early European trading on Wednesday. The US Dollar (USD) lost ground after April’s Consumer Price Index (CPI) figures came in below forecasts, prompting a shift in market sentiment.
The headline CPI rose 2.3% year-over-year in April, slightly down from 2.4% in March and below market expectations. Core CPI, which excludes food and energy, increased 2.8% annually, matching both the previous reading and consensus. On a monthly basis, both headline and core CPI climbed 0.2%. Traders now look ahead to key upcoming US data, including the Producer Price Index (PPI) and the University of Michigan’s Consumer Sentiment Survey, due later this week.
In Canada, consumer confidence continues to weaken. The IPSOS Consumer Confidence Index fell to 47.70 in April from 48.20 in March—the lowest level since July 2024. The decline reflects growing concerns over economic stability amid an ongoing trade dispute with the United States (US), as well as fears surrounding inflation and job security.
Meanwhile, last Friday’s underwhelming Canadian employment data—featuring sluggish job growth and a rising unemployment rate—has reduced expectations for additional rate hikes by the Bank of Canada (BoC). In contrast, markets have scaled back bets on US Federal Reserve (Fed) rate cuts, leading to a widening US-Canada yield spread, contributing downward pressure for the USD/CAD pair.
Crude Oil prices have also contributed to pressure on the commodity-linked Canadian Dollar (CAD). West Texas Intermediate (WTI) Oil price halted its four-day rally and is trading near $63.00 per barrel at the time of writing. Prices edged lower after the American Petroleum Institute (API) reported a surprise build in US crude inventories, with stocks rising by 4.29 million barrels last week—marking the largest increase in six weeks and defying expectations of a 2.4 million-barrel drawdown.
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.