Canadian Dollar consolidates near 1.3900 vs USD ahead of US tariffs deadline, FOMC Minutes
- USD/CAD struggles to gain any traction as traders seem hesitant amid a combination of diverging forces.
- Elevated US bond yields support the USD, though higher oil prices underpin the Loonie and cap the pair.
- Investors also seem hesitant ahead of a looming US tariffs deadline and the release of FOMC Minutes.
The USD/CAD pair struggles to capitalize on this week's modest recovery from its lowest level since June 3 and oscillates in a range around the 1.3900 mark during the Asian session on Wednesday. Traders seem hesitant to place aggressive directional bets ahead of a high-stakes US tariffs deadline and the release of FOMC Minutes.
US President Donald Trump and Canadian Prime Minister Mark Carney are engaged in last-minute talks in an effort to reach an agreement and avert 50% US tariffs on $20 billion worth of Canadian products. This comes just hours before a looming US deadline on Wednesday, August 19, and keeps traders on the sidelines, leading to the USD/CAD pair's subdued price action.
Meanwhile, FOMC Minutes will be looked upon for more cues about the US Federal Reserve's (Fed) future policy path amid inflation risks stemming from higher oil prices. In fact, West Texas Intermediate (WTI) – the benchmark US Crude Oil price – touches a nearly three-week high as the US-Iran standoff over the Strait of Hormuz keeps the geopolitical risk premium in play.
BNY’s Geoff Yu highlights that “bond prices are sending warnings” as the long end of the curve increasingly dictates the stance of financial conditions. He notes that the “30y U.S. Treasury yield has moved above 5.3%, its highest since 2007,” underscoring that the long end is “increasingly managing financial conditions even as U.S. data suggest the Fed may need to behave differently.” In Yu’s view, the move in long-term yields reinforces the message that global financing costs are being driven higher by market dynamics rather than policy rates alone, with the Dollar supported as investors demand greater compensation for duration and inflation risk.
In the meantime, interest rates remained the big story amid a rout in US Treasury bonds on Tuesday, which pushed the longer-end 30-year yield to its highest level since June 2007. This, along with fading US-Iran diplomacy hopes, acts as a tailwind for the safe-haven Greenback. However, rising oil prices underpin the commodity-linked Loonie and cap the USD/CAD pair.
Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and positioning for any further appreciating move.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair holds above the 50.00% Fibonacci retracement of the April-June upswing and the 200-day Simple Moving Average (SMA) near 1.3848, suggesting a supportive broader trend backdrop. A convincing break below, however, would expose the 61.8% retracement at 1.3818 and the 78.6% level at 1.3703.
On the topside, initial resistance is seen at the 38.2% Fibo. retracement at 1.3981, ahead of a stronger barrier at the 23.60% level at 1.4081. A sustained break above these caps should pave the way for a move towards the cycle high area at 1.4244.
(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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