USD/CAD trades cautiously above 1.4400 as Trump delays tariffs on Canada
- USD/CAD struggles above 1.4400 as US President Trump postpones his 25% tariff orders on Canada and Mexico.
- The BoC sees the risk of inflation undershooting their target of 2%.
- Investors await the US JOLTS Job Openings data for December.
The USD/CAD pair trades with caution around 1.4430 in Tuesday’s European session. The Loonie pair is almost 2.6% down from its Monday’s high of 1.4800 as the Canadian Dollar (CAD) strengthens after United States (US) President Donald Trump postponed his order to impose 25% tariffs on Canada and Mexico.
President Trump decided to delay tariff plans for 30 days after his North American peers agreed to tighten restrictions on their borders through which illegal immigrants and fentanyl were entering the US. This scenario has resulted in a sharp increase in the appeal of the Canadian Dollar (CAD).
The event has also indicated that Trump is using the tariff tool to gain an upperhand in negotiations with his trading partners and close better deals. The scenario has offered a big relief to the Canadian Dollar in the short-term but its longer-term outlook remains uncertain on the back of growing fears that inflation in Canada will undershoot the Bank of Canada’s (BoC) target of 2%.
Investors expect the BoC to reduce interest rates by 25 basis points (bps) to 2.75% in the policy meeting in March.
Meanwhile, the US Dollar (USD) has weakened as Trump’s decision to postpone tariffs on Canada and Mexico has diminished its safe-haven appeal. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, strives to gain ground near Monday’s low of 108.40.
On the economic front, investors will focus on the US JOLTS Job Openings data for December, which will be published at 15:00 GMT. Economists expect that employers posted 8 million fresh jobs, marginally lower than almost 8.10 million in November.
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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