USD/CAD remains subdued around 1.3700 due to increased risk appetite
- USD/CAD struggles following a US-EU trade agreement, which has eased fears of a broader trade conflict.
- The US and EU have agreed to impose a 15% tariff on EU exports to the United States.
- President Trump does not expect a trade deal with Canada to be finalized before the August 1 deadline.
USD/CAD depreciates after two days of losses, trading around 1.3700 during the Asian hours on Monday. The pair loses ground as the US Dollar (USD) as the market sentiment improves following the trade deal between the United States (US) and the European Union (EU).
The United States and European Union reached a framework trade agreement on Sunday, affecting nearly one-third of global trade, introduces a 15% tariff on EU exports to US and includes commitments from the bloc to increase purchases of US energy products and military equipment. The deal has ended a months-long stand-off, taking effect on August 1.
Additionally, market sentiment improves as US and China are expected to extend their tariff truce by another three months, according to a source cited by the South China Morning Post (SCMP) on Sunday. Traders await further development on the meeting between US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng, scheduled on Monday in Stockholm.
Traders also keep their eyes on the US Federal Reserve’s (Fed) interest rate decision due on Wednesday. The US central bank is widely expected to keep benchmark interest rate steady between 4.25% and 4.50% at its July meeting. The FOMC press conference will be observed for any signs that rate cuts may start in September. Markets have priced in nearly a 62% odds of a rate cut in September, according to the CME Group's FedWatch tool.
US President Donald Trump stated that he does not expect to finalize a trade deal with Canada ahead of August 1 deadline. "We haven't really had a lot of luck with Canada," Trump told reporters last week. "I think Canada could be one where there's just a tariff, not really a negotiation." Prior to that, Canadian Prime Minister Mark Carney indicated that Canada "will not accept a bad deal" and rush into an agreement, per BBC.
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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