USD/CAD remains unable to put a significant distance from year-to-date lows at 3.3590.
- The US Dollar remains on the defensive despite strong Nonfarm Payrolls data.
- Concerns about the impact of tariffs have resurfaced with the July 9 deadline looming.
- Trump's Tax bill has been finally approved, which increases fears about US fiscal health.
The US Dollar is failing to take any significant distance from year-to-date lows and remains capped below 1.3600 on Friday, unfazed by the strong US Nonfarm Payrolls report and the dwindling hopes of Fed cuts in July.
The Greenback ticked up on Thursday after the NFP report showed a larger-than-expected increase in net employment in June, but it was capped at 1.3610, and remains depressed below the 1.3600 level on Friday, with the nine-month lows, at 1.3555 in short distance.
US tariffs and debt woes hit the US Dollar
Market sentiment turned sour on Friday, as the focus shifted to Trump’s tariff deadline, on July 9, and with US trading partners awaiting letters that will inform them about their respective tariffs.
Investors’ concerns that those levies will spur inflation and curb economic growth have been undermining the US Dollar over the last few months and continue doing so today.
Beyond that, the US Congress finally passed Trump’s sweeping tax bill, a package that is expected to increase the US $36.2 trillion debt by an additional $3.3 trillion in the next 10 years and has boosted fears about the sustainability of the country’s fiscal deficit.
All this is keeping the US Dollar’s upside attempts limited and offsetting the impact of the relatively low Crude prices on the commodity-sensitive loonie, in a week with little relevant data from Canada.
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.