Canadian Dollar declines as US-Canada trade talks collapse
- USD/CAD gathers strength to around 1.3820 in Monday’s early European session.
- US imposed 50% tariffs on Canadian goods, while Canada’s PM Carney vowed ‘dollar-for-dollar’ retaliation from September 8.
- Iranian official remain defiant, saying sanctions will fail.
The USD/CAD pair recovers some lost ground to near 1.3820 during the early European session on Monday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) after US-Canada talks collapse into a trade war.
CNBC reported that Washington imposed 50% tariffs on some Canadian products on Saturday after trade talks between the two countries fell apart on Friday. In response, Canadian Prime Minister Mark Carney said that the country would impose its own retaliatory tariffs beginning on September 8.
Carney further stated that the government was “walking away from a bad deal”, and would now “match Washington’s new tariffs dollar for dollar.”
Later on Friday, the annual Jackson Hole conference kicks off in Wyoming, and the new US Federal Reserve (Fed) Chair Kevin Warsh is scheduled to speak. Traders would be looking for signals from Warsh over its commitment to fighting inflation. Any hawkish remarks from Fed officials could underpin the Greenback against the CAD in the near term.
On the other hand, rising tensions in the Middle East could boost crude oil prices, supporting the commodity-linked Loonie. Iran's Foreign Minister Abbas Araghchi dismissed the threat of new US sanctions as a sign of desperation on Sunday and said the expected new measures would fail to defeat Tehran. 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.
Tariff tensions resurface as US-Canada talks collapse
Analysts at Deutsche Bank note that trade frictions have re‑emerged as a key theme, with “tariffs… back in the headlines over the weekend, after the trade talks between the US and Canada broke down.” The bank highlights that the collapse in negotiations has quickly fed into market sentiment, reinforcing concerns over the trajectory of US‑Canada trade relations and adding to the broader backdrop of tariff uncertainty.
Technical Analysis: USD/CAD holds a negative outlook amid oversold territory
In the daily chart, USD/CAD maintains a bearish near-term tone as it holds beneath the 100-day Simple Moving Average (SMA) and the Bollinger Bands’ middle band. Price is retreating toward the lower Bollinger band support, while the Relative Strength Index (14) around 34 hovers in oversold territory, hinting that downside pressure persists but that the sell-off could be losing some steam.
On the topside, initial resistance emerges at the 100-day SMA at 1.3915, followed by the Bollinger middle band near 1.3940, with the upper Bollinger band at 1.4135 acting as a stronger cap if a rebound extends. On the downside, immediate support is seen at the lower Bollinger band around 1.3745, and a sustained break below this floor would open the way for further losses, keeping the pair anchored in its bearish bias.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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