USD/CAD holds positive ground above 1.4300 ahead of US, Canadian labour market data
- USD/CAD trades with mild gains near 1.4305 in Thursday’s late American session.
- Canada's Ivey PMI shows activity decreasing in January.
- Investors will closely monitor the US and Canadian labour market reports, which are due later on Friday.
The USD/CAD pair posts modest gains around 1.4305 during the late American session on Thursday, bolstered by a mild bounce in US yields. The markets might turn cautious amid the ongoing uncertainty surrounding US President Donald Trump’s trade policies and ahead of the release of the US and Canadian January labour market reports.
Trump delayed his orders to impose 25% tariffs on Canada for 30 days. However, the threat of US trade tariffs remains in place and any signs of escalating renewed trade tensions between the US and Canada could exert some selling pressure on the Loonie.
Additionally, Thursday's downbeat Canadian economic data weighed on the Canadian Dollar (CAD). Canada’s Ivey Purchasing Managers Index (PMI) data showed that Canadian economic activity contracted for the first time in five months in January as employment increased at a slower rate and prices rose.
Investors will keep an eye on the Canadian employment reports. Canada is projected to add far fewer jobs in January compared to December, down to 25K from 90.9K, and the Canadian Unemployment rate is estimated to tick up to 6.8% from 6.7%.
On the US front, economists expect the US economy to have added around 170,000 jobs in January, marking a significant slowdown from 256,000 gain in December. The unemployment rate is forecast to hold steady at 4.1%, suggesting continued resilience in the labour market despite recent economic headwinds.
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.