USD/CAD treads water above 1.3700 as tariff tensions ease following US-China meeting
- USD/CAD receives support from improved risk sentiment amid easing US-China tariff dispute.
- US-China advisors are expected to meet again in London on Tuesday.
- Improved crude Oil prices contribute support for the commodity-linked CAD.
USD/CAD extends its winning streak for the third successive session, trading around 1.3700 during the Asian hours on Tuesday. The pair appreciates as the US Dollar (USD) gains ground as market sentiment improves amid easing tariff war tensions between the United States and China.
Treasury Secretary Scott Bessent mentions discussions held on Monday as a “good meeting,” meanwhile Commerce Secretary Howard Lutnick noted them as “fruitful,” increasing expectations of progress in improving relations between the two countries. Again, on Tuesday, officials from the world’s two largest economies are expected to meet to continue the trade talks with expectations of easing tensions over shipments of technology and rare earth elements, per Bloomberg.
Additionally, the Greenback may gain ground due to increased odds of the Federal Reserve (Fed) keeping its benchmark interest rate unchanged at its next two monetary policy meetings, driven by recent stronger-than-expected US jobs data. Traders now turn their attention to the US Consumer Price Index (CPI) inflation, scheduled to be released on Wednesday, seeking fresh insights into the Federal Reserve's monetary outlook.
However, the upside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) may receive support from the improved Oil prices. As Canada is the largest crude exporter to the United States (US), higher Oil prices provide support for the CAD.
West Texas Intermediate (WTI) Oil price remains steady above $64.50 per barrel at the time of writing. Crude Oil prices receive support from positive risk sentiment, driven by a potential trade deal between the US and China.
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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