On Thursday, CAD was one of the worst performing currencies, surrendering all its recent strength against USD. This drop in sales occurred as trade tensions between Canada and the United States ratcheted up. The CAD depreciated by 0.32% against the USD, losing about 45 pips. The continuing trade talks, soon to shift from Canada to US–China relations, have ratcheted up uncertainty in the currency markets, bringing downward pressure on the CAD’s value. What is the value of a Canadian Dollar worth based on US Dollars? Key drivers are the interest rates that are controlled by the Bank of Canada, oil prices and to a large extent, the state of the US economy.
Interest Rates and Economic Indicators
Interest rates determined by the Bank of Canada also hold considerable sway over the Canadian Dollar. The BoC’s mandate is to keep inflation in the 1-3% area. It does this by raising or lowering interest rates, which sets the rates that banks can lend to each other at. Usually, when the BoC hikes interest rates, it ends up increasing the value of the CAD since higher interest rates attract foreign investors. On the flip side, if interest rates drop, this may put downward pressure on the currency.
Additionally, macroeconomic data releases such as GDP figures, Purchasing Managers’ Indices (PMIs) for manufacturing and services, employment statistics, and consumer sentiment surveys impact the CAD’s value. Typically, a solid batch of economic data will support the Canadian Dollar as it conveys an outlook of a strong economy. On the flip side, negative economic data releases will cause the CAD to drop in value.
Oil Prices and Trade Balance
Oil prices are another major determinant of the Canadian Dollar’s value. Because oil is Canada’s largest export, changes to the price of oil immediately affect the CAD. One of the common economic effects of higher oil prices, at least in Canada, is an appreciation of the Canadian Dollar as it increases Canadian revenues from exports. Declining oil prices exert negative pressure on the CAD.
The Trade Balance measures the difference between the value of Canada’s exports and imports. It is perhaps the most important factor in driving the CAD. As a basic economic principle, a positive trade balance—where exports are greater than imports—often serves to strengthen the currency. It can be undermined by a large negative trade balance.
US Economy and Bilateral Relations
The performance of the Canadian Dollar is tied closely to the health of the US economy. This is largely due to the deep trade relationship between Canada and the United States. Usually, a strong US economy will fuel a stronger CAD, as it increases demand for Canadian exports.
Cadadian Prime Minister Mark Carney shows willingness to go to war with the US. This is happening against a backdrop of simmering and increasingly escalating trade tensions. This new announcement makes the situation more confusing. Second, it would have a radicalizing effect on bilateral political relations and trade flows between the two countries.