USD/CAD gains ground above 1.4300 as Trump announces new auto tariffs from overseas
- USD/CAD recovers to near 1.4305 in Wednesday’s late American session.
- Trump announced 25% tariffs on car imports to the US.
- BoC Minutes showed the central bank would probably have left rates unchanged if not for tariff risks.
The USD/CAD pair rebounds to around 1.4305 during the late American session on Wednesday. Concerns surrounding expected US auto tariffs and alleviated geopolitical tensions lift the Greenback against the Canadian Dollar (CAD). Traders will keep an eye on the US weekly Initial Jobless Claims, the final Q4 Gross Domestic Product (GDP) report, which is due later on Thursday.
Late Wednesday, US President Donald Trump signed an order to implement a 25% tariff on auto imports, widening the global trade war. Trump said the tariffs would go into effect on April 2 and that the US would start to collect them a day later. This development weighs on the Loonie and acts as a tailwind for the pair as Canada sends about 75% of its exports to the United States, including oil and autos.
The Bank of Canada's (BoC) latest Meeting Minutes indicated that fears of trade-policy uncertainties "significantly weakening" near-term economic growth prompted the BoC to lower its key interest rate this month, despite some policymakers arguing that a pause was appropriate.
Trump stated in late November to hit Canada and Mexico with 25% tariffs on imports but held off in February and March from implementation. The policies are now set to take effect on April 2, even though the Toronto Star reported on Wednesday that Canada could be on the lower end of the tariffs. The Trump administration's unpredictability is likely to undermine the CAD in the near term.
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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