USD/CAD consolidates above 1.4300 mark; upside potential seems limited
- USD/CAD struggles to gain any meaningful traction and hangs near a two-week trough.
- Subdued Oil prices and the BoC’s dovish outlook undermine the Loonie and cap the pair.
- The USD languishes near the weekly low and further acts as a headwind for spot prices.
The USD/CAD pair enters a bearish consolidation phase after registering heavy losses over the past two days and holds above the 1.4300 mark during the Asian session on Wednesday. Moreover, the fundamental backdrop warrants some caution before confirming that a sharp pullback from a two-decade high touched on Monday has run its course.
Crude Oil prices struggle to capitalize on the overnight bounce from the year-to-date (YTD) low amid US-China trade tensions. This, along with the Bank of Canada's (BoC) dovish outlook, undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair. That said, a weaker US Dollar (USD) is holding back traders from placing aggressive bullish bets around the currency pair.
In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near the weekly low amid expectations that the Federal Reserve (Fed) will lower borrowing costs further by the end of this year. The bets were reaffirmed by the Job Openings and Labor Turnover Survey (JOLTS) released on Tuesday, which pointed to a slowdown in the US labor market.
Apart from this, US President Donald Trump's decision to delay the 25% trade tariffs on Canadian and Mexican imports by 30 days contributes to capping the USD/CAD pair. Traders now look forward to the US economic docket – featuring the release of the ADP report on private-sector employment and the ISM Services PMI. This, along with Oil price dynamics, should provide some impetus to spot prices.
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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