Canadian Dollar bears seem hesitant as weak USD counters US-Canada trade war
- USD/CAD kicks off the new week on a positive note, though it lacks follow-through buying.
- US-Canada trade war fears and sliding oil prices undermine the Loonie and lend support.
- A weak USD caps further gains as US-Iran tensions keep geopolitical risk premium in play.
The USD/CAD pair struggles to capitalize on a bullish gap opening on Monday, though it retains an intraday positive bias amid concerns about a deepening US-Canada trade war. Spot prices currently trade just below the 1.3800 mark, up nearly 0.30% for the day, and, for now, seem to have snapped a three-day losing streak to a three-month low, touched on Friday.
The US imposed 50% tariffs on $20bn worth of Canadian goods 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. This, along with a modest pullback in crude oil prices, undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair.
The US Dollar (USD), on the other hand, hangs near its lowest level in more than three months amid diminishing odds for a rate hike by the US Federal Reserve (Fed). Moreover, the US Treasury announced last week that it would at least double buyback operations for long-dated government debt starting in September, triggering a pullback in US bond yields. This further weighs on the USD and caps the USD/CAD pair.
On the geopolitical front, US Treasury Secretary Scott Bessent is due to announce what he has called the toughest sanctions in history on Iran at a press conference on Monday. Iran's Supreme National Security Council secretary, Mohsen Rezaei, responded by warning that the Islamic Republic would halt all oil exports through the Strait of Hormuz and anywhere else in the Persian Gulf if economic war continues.
Rezaei added that any country participating in the US sanctions would be treated as an act of war against Iran, keeping the war-risk premium in play. This could act as a tailwind for crude oil prices and the safe-haven USD, warranting caution before placing aggressive directional bets on the USD/CAD pair. Hence, strong follow-through buying is needed to confirm that spot prices have bottomed out in the near term.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair keeps a bearish near-term bias beneath the 200-day Simple Moving Average (SMA) at 1.3844. The said hurdle should cap any recovery beyond the 61.8% Fibonacci retracement level of the May-June rally, at 1.3815. A sustained strength, however, could lift spot prices to the 50% retracement at 1.3897, with deeper barriers at 1.3980 and the 23.6% level at 1.4081 ahead of the cycle high region near 1.4246. On the downside, initial support is seen at the 78.6% retracement at 1.3698, ahead of the prior swing low area around 1.3549, where buyers may attempt to stem further losses if the current bearish pressure extends.
(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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