Canadian Dollar gains traction on fading Fed rate hike bets, US-Canada tariff pause
- USD/CAD drifts lower to near 1.3790 in Thursday’s early European session.
- Traders pare bets on Fed rate hikes following tame US inflation data.
- Trump paused new tariffs on Canada for three days.
The USD/CAD pair declines to around 1.3790 during the early European trading hours on Thursday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) as cooling US inflation dampens aggressive US Federal Reserve (Fed) policy expectations. Traders will keep an eye on the US Initial Jobless Claims data, which will be released later in the day.
Data showed last week that US Retail Sales dropped in July for the first time in nine months, following unexpected job losses last month and tame inflation figures. This, in turn, could weigh on the Greenback in the near term. Traders expect a 32.7% odds of a rate hike at the Fed's September meeting, compared to 47% a month earlier, according to the CME FedWatch tool.
US President Donald Trump said on Wednesday that he will pause imposing new tariffs on a wide array of Canadian goods for three days as the countries firm up a trade deal, per BBC. The announcement came less than two hours before 50% duties on nearly $20bn of Canadian imports were set to go into place.
Meanwhile, rising crude oil prices amid the ongoing US-Iran conflicts and uncertainty surrounding the Strait of Hormuz could provide some support to the commodity-linked Loonie. Reuters reported on Thursday that Iran's Foreign Minister Abbas Araghchi dismissed US President Donald Trump’s threatened “economic D-Day” against Tehran as an attempt to divert attention from US debt and rising interest costs.
Trump on Wednesday announced the most severe economic action ever taken against Iran, saying this will be economic conflict and isolation on an unprecedented scale and the countries allowing financial aid to Iran will face severe economic consequences. 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.
US pauses Canada tariffs as Trump signals deal after Carney talks
Strategists at BNY highlight that President Donald Trump has temporarily stepped back from escalating trade measures against Canada, noting that he has "paused the scheduled 50% tariffs on certain Canadian imports for three days" after holding trade talks with Canadian Prime Minister Mark Carney. BNY adds that Trump has indicated the two countries "have a deal," though this remains "subject to final documents," underscoring that the immediate tariff threat has been delayed but not yet definitively removed.
Technical Analysis: USD/CAD remains capped under the 100-day SMA
In the daily chart, USD/CAD maintains a bearish near-term bias as spot holds beneath the 100-day simple moving average (SMA) and the 20-day Bollinger middle band. Price is only marginally above the lower Bollinger band, while the Relative Strength Index (14) at 25.47 sits in oversold territory, suggesting that although downside pressure dominates, selling may be becoming stretched.
On the topside, initial resistance is seen at the 100-day SMA at 1.3915, followed by the 20-day Bollinger SMA band around 1.3975, with a stronger cap at the upper Bollinger band near 1.4160. On the downside, immediate support is provided by the lower Bollinger band at 1.3788, and a sustained break beneath this floor would expose further weakness in the pair despite the already oversold RSI backdrop.
(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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