USD/CAD trades with negative bias below mid-1.3700s, lacks bearish conviction
- USD/CAD attracts some sellers as Fed Governor Waller’s dovish remarks undermine the USD.
- Reduced Fed rate cut bets help limit the USD downside and lend support to the currency pair.
- Trade-related uncertainties offset an uptick in Oil prices and might keep a lid on the Loonie.
The USD/CAD pair drifts lower during the Asian session on Friday and moves away from a three-and-a-half-week high, around the 1.3775 region touched the previous day. Spot prices, however, lack bearish conviction and trade just below mid-1.3700s, down less than 0.10% for the day.
The US Dollar (USD) retreats slightly from its highest level since June 23 in reaction to dovish comments from Federal Reserve (Fed) Governor Christopher Waller, saying that the central bank should cut its interest rate target in July. Apart from this, the upbeat market mood turns out to be another factor acting as a headwind for the safe-haven buck and exerting some downward pressure on the USD/CAD pair.
Any meaningful USD depreciation, however, seems elusive amid bets that the Fed will keep interest rates higher for longer amid inflationary concerns. The Canadian Dollar (CAD), on the other hand, might struggle to attract strong follow-through buyers on the back of persistent trade-related uncertainties. In fact, Trump announced a 35% tariff on imports from Canada, which will go into effect on August 1.
Trump added that levies would increase further if Canada retaliated. Adding to this, a 50% tariff on US copper imports should keep a lid on the CAD and offer support to the USD/CAD pair. Meanwhile, Crude Oil prices edge higher and look to build on the overnight bounce, though the upside remains limited. This might further contribute to capping the commodity-linked Loonie and limiting losses for the USD/CAD pair.
Traders now look to the US economic docket – featuring the release of Preliminary Michigan US Consumer Sentiment and Inflation Expectations, along with housing market data. Moreover, the broader risk sentiment will drive the USD. Adding to this, Oil price dynamics should provide some impetus to the USD/CAD pair. Nevertheless, spot prices remain on track to register modest gains for the second straight week.
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.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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