USD/CAD rebounds to near 1.3950 following Trump-Xi meeting
- USD/CAD recovered its intraday losses as the US Dollar received support following the Trump-Xi meeting.
- President Trump announced plans to cut tariffs on China to 47%, down from the current 57%.
- The Bank of Canada indicated that the October rate cut may be the end of its easing cycle.
USD/CAD pared its daily losses and is hovering around 1.3950 during the European trading hours on Thursday. The pair gains ground following the meeting between US President Donald Trump and China’s President Xi Jinping in South Korea. The US Dollar received support after Trump announced that tariffs on China would be reduced to 47% from the current 57%. Additionally, he added that the rare earth dispute has been resolved, ensuring no further restrictions on China’s rare earth exports.
The USD/CAD pair faced challenges as the US Dollar (USD) struggled amid ongoing uncertainty surrounding the Federal Reserve (Fed) policy stance in December. Fed Chair Jerome Powell highlighted significant differences of opinion among policymakers on the path forward and stressed that another rate cut in December is far from certain. Fed officials noted a moderate rise in inflationary pressures during the second half of the year, though not enough to rule out further rate cuts.
However, the Greenback received support after the Fed acknowledged it would continue to ease back on Quantitative Easing (QE) practices, with the process of drawing down the Fed's mortgage-backed asset balance sheet into long-term Treasuries by December 1.
The Bank of Canada (BoC) delivered a 25-basis-point rate cut on Wednesday, bringing its policy rate down to 2.25%. The central bank described this level as “about right if inflation and activity evolve as projected,” hinting that the latest cut may signal the end of its easing cycle.
Governor Tiff Macklem stated that the rate cut aims to support the economy amid adjustments to US trade policy. Macklem added that monetary policy has limited capacity to stimulate demand while keeping inflation low, given the negative impact of tariffs on Canada’s economic outlook.
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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