Traders and economists all have one eye on the Canadian Dollar (CAD). Another set of international developments is forcing them to redirect their gaze towards this currency. Another major CAD driver is the monetary policy decisions taken by the Bank of Canada (BoC). Its changes to interest rates are especially powerful. Meanwhile, developments such as US tariff changes, the strength of the Australian economy, and fluctuating oil prices continue to influence the currency's value. As markets brace for upcoming economic data releases and central bank announcements, the interplay between these factors remains under scrutiny.
Bank of Canada’s Role in Shaping the CAD
The Bank of Canada exerts considerable influence over the Canadian Dollar by setting interest rates that determine the cost of borrowing between banks. Whether rapidly increasing or not, this mechanism is important in helping keep inflation at 1-3% as per TDBC’s mission. Interest rate hikes tend to strengthen the CAD because higher interest rates lure foreign capital, raising demand for the currency. On the other hand, rate cuts can put downward pressure on the CAD by reducing the attractiveness of Canadian assets.
Beyond adjusting policy interest rates, the BoC employs quantitative easing and tightening to adjust the cost and availability of credit. Quantitative easing requires the Bank to purchase government securities, which increases liquidity in the economy and decreases the CAD value in the process. Contrary to quantitative easing, quantitative tightening works to withdraw liquidity which could further strengthen the CAD.
The value of the Canadian dollar is largely influenced by the general economic prosperity of that country. Under normal conditions, a strong economy would serve to solidify the CAD by increasing investor confidence in Canada’s economy. Key macroeconomic indicators such as GDP growth, Manufacturing and Services PMIs, employment figures, and consumer sentiment surveys are crucial in assessing economic health and forecasting currency movements.
Global Influences: Tariffs, Oil Prices, and More
On the global front, inflation, supply chain problems, and the war in Ukraine are all converging on the Canadian Dollar right now. Rumors of US reciprocal narrower reciprocal tariffs have sent the AUD dollar soaring. These anticipated announcements are due on April 2. Positive Australian Manufacturing PMI data and continued supportive measures from China add to this momentum. These advancements serve to illustrate how connected global markets are and more importantly, their power to affect national currencies.
Oil prices continue to be a key driver of the CAD’s exchange rate as petroleum is still Canada’s biggest export by a wide margin. Higher oil prices usually mean a stronger CAD, as they improve Canada’s trade balance by driving higher export revenues. On the other hand, falling oil prices can increase downward pressure on the currency, through the effect from decreasing export revenues.
The US economy's performance is another key factor influencing the Canadian Dollar, given that the United States is Canada's largest trading partner. Given how tightly integrated both countries’ economies are, any significant economic change in the US would be felt almost immediately on the CAD. The recent markets’ expectations of a forthcoming Federal Reserve rate cut have created selling pressure on the US Dollar. This change in sentiment has posed strong headwinds for any currency pair involving the USD.
Upcoming Economic Data and Central Bank Decisions
Now as markets await the first key economic data releases and the next round of central bank meetings, an intense laser pointer is focused on all indicators. Back in the UK, all eyes turn towards the budget and CPI. This is on the heels of a hawkish BoE rate hike. These types of affect market mood and sentiment, affecting currencies that are highly developed with these styles of economies.
For Canada, macro data releases will remain key in determining direction and conviction behind CAD expectations. The BoC’s foundational objective of keeping inflation in line with its 2% target will likely remain the impetus behind monetary policy going forward. As a result, any unexpected turns as per anticipated economic outcomes are going to be felt painfully on market expectations and thus currencies’ values.