USD/CAD remains below 1.4450 amid recession fears in the United States
- USD/CAD remains under pressure as the US Dollar weakens amid growth concerns over the US economy.
- President Donald Trump referred to the economy as being in a "transition period," hinting at a potential slowdown.
- The Bank of Canada is widely expected to cut rates by 25 basis points at its March meeting on Wednesday.
USD/CAD holds losses after two days of gains, trading around 1.4440 during the Asian hours on Tuesday. The pair loses ground as the US Dollar (USD) struggles amid concerns that tariff policy uncertainty could push the US economy into recession. Investors are now looking ahead to February’s Consumer Price Index (CPI) release on Wednesday for further insights into inflation trends.
US President Donald Trump characterized the economy as being in a "transition period," hinting at a potential slowdown. Investors took his remarks as an early signal of possible economic turbulence in the near future.
Fed Chair Jerome Powell reassured markets that the central bank sees no immediate need to adjust monetary policy despite rising uncertainties. San Francisco Fed President Mary Daly echoed this sentiment, noting that increasing business uncertainty could dampen demand but does not justify an interest rate change.
US Commerce Secretary Howard Lutnick stated on Sunday that the 25% tariffs, imposed by President Donald Trump in February, on imports from top foreign suppliers like Canada and Mexico, set to take effect on Wednesday, are unlikely to be postponed, according to Bloomberg. While US steelmakers have urged Trump to maintain the tariffs, businesses reliant on these materials may face increased costs.
The Bank of Canada (BoC) is expected to cut rates by 25 basis points at its March meeting on Wednesday. CIBC analysts predict the central bank will lower its benchmark rate to 2.75%, with further cuts likely if trade uncertainty continues.
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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