USD/CAD holds positive ground near 1.4350 as Trump vows Canada tariffs
- USD/CAD posts modest gains around 1.4340 in Wednesday’s early Asian session.
- Trump threatened 25% tariffs on Mexico and Canada on February 1, weighing on the CAD.
- Canadian headline CPI rose below consensus in December.
The USD/CAD pair trades with mild gains around 1.4340 during the early Asian session on Wednesday. The Canadian Dollar (CAD) weakens amid softer Canada’s December Consumer Price Index (CPI) inflation data and concerns about a trade war between the United States and Canada.
On Monday, US President Donald Trump said that he was thinking of imposing 25% tariffs on imports from Canada and Mexico on February 1 as both countries were allowing many people to cross the border as well as fentanyl. Trump’s remarks exert some selling pressure on the Loonie as Canada is highly dependent on trade with the US, with roughly 75% of its exports heading south.
Canadian Prime Minister Justin Trudeau stated that his government is ready to respond to any scenario if Trump implements tariffs on Canada. Trudeau added that Trump's promised prosperity for the United States would need Canadian resources to fuel it.
Canada’s CPI report has opened the door to the Bank of Canada (BoC) rate cut in January. Data released by Statistics Canada on Tuesday showed that the country’s CPI inflation eased to 1.8% YoY in December from 1.9% in November. This reading was slightly below the 1.9% expected.
“We believe that the Bank of Canada should continue to ease monetary policy by cutting its policy rate by 25 basis points next week. This would give us a little more hope of seeing economic growth above potential assuming Canada is able to avoid a tariff war with our largest trading partner,” said Matthieu Arseneau, economist at the National Bank of Canada.
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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