USD/CAD holds steady above 1.3700 as tariff uncertainty lingers
- USD/CAD flat lines near 1.3725 in Monday’s early Asian session.
- Tariff uncertainty continues to undermine the Canadian Dollar.
- BoC Business Outlook Survey will be the highlight later on Monday.
The USD/CAD pair trades on a flat note near 1.3725 during the early Asian session on Monday. Tariff uncertainty might continue to weigh on the Canadian Dollar (CAD) against the US Dollar (USD). Traders await the release of the Bank of Canada (BoC) Business Outlook Survey for fresh impetus, which will be published later on Monday.
US President Donald Trump threatened a 35% tariff on goods imported from Canada. US Commerce Secretary Howard Lutnick on Friday dismissed the question of whether US free trade with Canada is dead, calling the notion "silly" and saying a substantial amount of Canadian goods enter the US tariff-free under the current North American free trade deal. The uncertainty surrounding the new tariff rate raises concerns over a renewed trade war between the US and one of its most important trading partners, which could undermine the CAD.
However, dovish comments from the Federal Reserve (Fed) might cap the upside for the Greenback. Fed Governor Christopher Waller said late Thursday that the labor market is doing fine overall but less so in the private sector. Waller believes that the Fed should reduce its interest rate target at the July meeting, citing mounting economic risks. Financial markets are now pricing in a September starting date for rate cuts, and Fed officials penciled in two easings later this year, according to Reuters.
Furthermore, a rebound in Crude Oil prices could support the commodity-linked Loonie lower in the near term. 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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