USD/CAD attracts some buyers above 1.4250 as Trump unveils tariff plans
- USD/CAD edges higher to around 1.4275 in Wednesday’s late American session.
- Trump said he will impose a 10% baseline tariff across the board.
- Trump’s reciprocal tariff policy and lower crude oil prices weigh on the commodity-linked Canadian Dollar.
The USD/CAD pair attracts some buyers to near 1.4275, snapping the two-day losing streak during the late American session on Thursday. The Canadian Dollar (CAD) weakens against the US Greenback as traders turn cautious after US President Donald Trump signed a reciprocal tariff policy at the White House.
Trump said late Wednesday that he will set a 10% baseline tariff across the board. The Trump administration stated that Canada and Mexico will be exempt from the baseline 10% tariff rate, as well as reciprocal levies for specific countries for now.
The 10% tariff would take effect only when the original 25% duties Trump slapped on Canadian and Mexican imports are terminated or suspended. The 25% tariff was based on allegations that the neighboring countries were failing to stem the flow of drugs and crime into the United States. Canadian Prime Minister Mark Carney said that the country will fight Trump's tariffs with countermeasures, raising concerns over the trade war.
A fall in Crude Oil prices amid the fears that a global trade war may dampen demand for crude exerts some selling pressure on the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
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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