USD/CAD remains on the defensive near 1.3700 as tariff fears resurface
- USD/CAD trades in negative territory around 1.3715 in Tuesday’s early Asian session.
- US May ISM Manufacturing PMI eased to 48.5 in May, weaker than expected.
- Crude Oil prices rose after the report that the OPEC+ kept output hikes unchanged, supporting the commodity-linked Loonie.
The USD/CAD pair remains on the defensive near 1.3715 during the early Asian session on Tuesday. The US Dollar Index (DXY) softens to fresh seven-week lows amid jitters over the health of the US economy. The JOLTs Job Openings will be published later on Tuesday.
The Greenback edges lower as traders remain concerned over the ongoing tariff uncertainty and its potential to hurt growth in the US economy. US President Donald Trump announced on Friday that he plans to double import tariffs on steel and aluminum, effective Wednesday. This put pressure on global steel producers and intensified trade war. "Any time we see a resurgence in tariff concerns, everyone begins to pile back into the 'sell America' trade once more," said Michael Brown, market analyst at online broker Pepperstone in London.
Additionally, the US manufacturing sector has continued a trend of contraction for three consecutive months. This downbeat US economic data contributes to the USD’s downside. Data released from the Institute for Supply Management (ISM) on Monday showed that the US Manufacturing Purchasing Managers Index (PMI) eased to 48.5 in May from 48.7 in April. This figure came in weaker than the expectation of 49.5.
Later on Friday, all eyes will be on the US employment report for May. The US Nonfarm Payrolls (NFP) is expected to show job growth of 130K in May, while the Unemployment Rate is projected to remain steady at 4.2% in the same report period. In case of a stronger-than-expected outcome, this could lift the Greenback and help limit the pair’s losses.
Meanwhile, a rise in Crude Oil prices after the report that the OPEC+ kept output hikes unchanged, raising its production by the expected 411K barrels per day (bpd) in July, might underpin the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
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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