Canadian Dollar holds gains above 1.3650 on lingering US tariff uncertainty
- USD/CAD drifts lower to near 1.3670 in Thursday’s early European session.
- US Trade Representative said tariffs will go up to 15% or higher for some countries.
- Traders await the release of the Canadian GDP and US PPI reports on Friday for fresh impetus.
The USD/CAD pair trades on a softer note around 1.3670 during the early European session on Thursday. The US Dollar (USD) softens against the Canadian Dollar (CAD) amid lingering uncertainty over US economic policies and fresh concerns regarding potential tariff increases. The Canadian Gross Domestic Product (GDP) and US Producer Price Index (PPI) reports will be the highlights later on Friday.
US Trade Representative Jamieson Greer on Wednesday stated that US President Donald Trump plans to raise this rate to 15% or higher for many countries in the coming days. This authority is limited to a 150-day window unless extended by Congress. Comments from Greer regarding potential tariff hikes have dampened confidence in the Greenback.
Persistent geopolitical risks could boost crude oil prices and provide some support to the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD. Traders will closely monitor the developments surrounding the US-Iran nuclear negotiations. US and Iranian officials are due to meet in Geneva on Thursday for a third round of indirect talks.
All eyes will be on the US January PPI data on Friday. Economists expect the PPI to show a moderate increase of 0.3% MoM in January, compared to 0.5% recorded in December. The annual PPI is estimated to show a rise of 2.6% in January versus 3.0% prior. A "hotter-than-expected" reading could further dampen expectations for interest rate cuts and underpin the USD against the CAD in the near term.
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.
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