USD/CAD hovers near 1.3750 amid uncertainty over US-Canada tariff deal
- USD/CAD may regain its ground amid rising tariff uncertainty between the United States (US) and Canada.
- Canadian Prime Minister Mark Carney stated that trade negotiations between the two countries have entered an intense phase.
- The Fed is widely expected to keep the benchmark interest rate steady between 4.25% and 4.50% in July.
USD/CAD halts its three-day winning streak, trading around 1.3740 during the Asian hours on Tuesday. The pair may further appreciate as the Canadian Dollar (CAD) could struggle amid rising tariff uncertainty between the United States (US) and Canada.
Canadian Prime Minister Mark Carney told reporters on Monday, reiterating that an agreement without any tariffs at all was unlikely. Carney said that talks between the two countries on a trade deal are at an intense phase. “It's a complex negotiation,” “we will only sign a deal that's the right deal,” he added. The US and Canada are working to reach an agreement by August 1, as US President Donald Trump is threatening to impose a 35% tariff on some Canadian imports.
The US Dollar (USD) gains ground after the United States and the European Union (EU) reached a trade agreement last week, setting 15% tariffs on most European goods, taking effect on August 1. Additionally, traders keep their eyes on further developments in the US-China trade talks. The discussions are set to resume on Tuesday, following over five hours of negotiations between top economic officials from both nations in Stockholm on Monday.
The US Federal Reserve (Fed) is widely expected to keep the benchmark interest rate steady between 4.25% and 4.50% at its July meeting. The FOMC press conference will be observed for any signs that rate cuts may start in September.
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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