USD/CAD returns to 1.3730 with the Dollar showing a firmer tone
- The US Dollar trims some losses on a mild improvement in sentiment.
- The US Manufacturing PMI adds to evidence of the tariffs' negative impact on the sector.
- Hopes of a hawkish BOC are keeping the CAD buoyed.
The US Dollar is trading on a somewhat stronger note on Tuesday, favoured by an improved market sentiment, which has helped the USD/CAD to bounce from year-to-date lows below 1.3700 and return to 1the 1.3730 area at the moment of writing.
The broader trend, however, remains bearish, with speculative demand for the YS Dollar weak, on concerns about Trump’s tariffs’ impact on the US economy and looming fears about the US fiscal health.
The Dollar needs strong US data to confirm its recovery
The US ISM Manufacturing PMI figures released on Monday confirmed that trade uncertainty is taking its toll on the sector. The PMI declined for its third consecutive time, against expectations of a slight improvement. The employment and new orders subindexes ticked up, with prices declining and delivery times increasing, and rising concerns about potential shortages in some products.
The figures added pressure on an already weak USDollar, but the Greenback managed to pick up during the Asian session, with market sentiment improving somewhat.
In Canada, the strong Gross Domestic Product figures seen last week have cemented expectations that the Bank of Canada will keep interest rates on hold, which is keeping the Canadian dollar’s dips limited.
The focus today will be on the US Factory Orders release, of particular interest after Monday’s weak manufacturing data, and the US JOLTS Job Openings. The US Dollar needs positive surprises to extend its recovery.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.