USD/CAD recovery extends to levels near 1.3700 boosted by risk aversion
- Fears of US tariffs letters are buoying the US Dollar on higher demand for safe assets.
- Uncertainty about the size of the levies and the new tariff deadline keeps investors on their toes.
- A decline in Oil prices after the OPEC+ supply hike added pressure on the CAD earlier on Monday.
The US Dollar accelerated its recovery against the Canadian Dollar on Monday with renewed concerns about US tariffs fuelling a rush for safety, as the July 9 deadline approaches.
The Greenback is trading 0.5% higher on the day, and 0.8% above last week’s lows as Trump announced letters to “some countries” specifying the tariffs that will be applied to their products.
Higher tariffs, lower Oil prices hurt the CAD
When those tariffs will come into effect remains unclear, as the Treasury Secretary Scot Bessent pointed to August 1 as a potential new deadline, which might give some margin to negotiate agreements with countries other than China, the UK and Vietnam, the oly ones that were able to cut a deal with the US since April 2.
The Canadian Dollar came under pressure at the market opening times amid lower Oil prices. OPEC+ countries approved a larger-than-expected increase in Crude supply over the weekend and pointed to another such increase in September.
The US benchmark WTI prices declined below the $65.00 level, dragging the Canadian Dollar down with them, as Oil is Canada’s main export, but the pair trimmed some losses as Oil prices regained some ground and returned to the previous range, above $66.00.
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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