USD/CAD posts modest gains above 1.3800 amid Trump’s tariff threats
- USD/CAD trades with mild gains near 1.3835 in Wednesday’s early Asian session.
- Tensions between the US and Europe over Greenland might cap the upside for the US Dollar.
- Market odds for a BoC hold on January 28 are around 88%.
The USD/CAD pair posts modest gains around 1.3835 during the early Asian session on Tuesday. However, the threat of a fresh US trade clash with Europe could weigh on the Greenback against the Canadian Dollar (CAD). Traders await the speech by US President Donald Trump at the World Economic Forum in Davos, Switzerland, on Wednesday for fresh impetus.
US President Donald Trump threatened to impose tariffs on eight European nations that oppose his plans to take control of Greenland. It would rise to 25% if an agreement is not reached by June 1. European Union leaders will convene in Brussels for an emergency summit on Thursday. White House threats to Europe over the future of Greenland might trigger the so-called “Sell-America” trade, which could drag the US Dollar (USD) lower broadly.
"We're seeing the U.S. dollar take it on the chin and obviously the Canadian dollar is benefiting as a result of that movement," said Rahim Madhavji, president at KnightsbridgeFX.com. "It looks like the market is rattled by the actions of the U.S. administration."
Canada’s annual Consumer Price Index (CPI) inflation rose to 2.4% in December from 2.2% in November, according to Statistics Canada on Monday. On a monthly basis, the CPI fell 0.2% in December, compared to an increase of 0.1% in the previous reading. Meanwhile, the core inflation measures, which the Bank of Canada (BoC) closely monitors, continued to moderate in December.
Analysts largely expect the BoC to hold the rate steady for the upcoming January 28 decision and potentially through most of 2026 due to a mixed economic picture.
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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