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28 Jan 2025
USD/CAD posts modest gains above 1.4350 amid Trump tariff uncertainty
- USD/CAD trades with a mild positive bias near 1.4370 in Monday's early Asian session.
- The BoC will go ahead with another cut to its benchmark interest rate on Wednesday.
- Fears of a trade war with the US weigh on the Loonie.
The USD/CAD pair trades with mild gains around 1.4380 during the early Asian session on Tuesday. Traders continue to digest the narrative of further tariff policies from the US President Donald Trump administration. All eyes will be on the Bank of Canada (BoC) and the US Federal Reserve (Fed) interest rate decision on Wednesday.
The interest rate differential between Canada and the United States (US) could exert some selling pressure on the Canadian Dollar (CAD). The Canadian central bank has cut its policy rate a total of 1.75 percentage points in five consecutive decisions, cutting by 50 basis points (bps) in October and December amid signs of weakness in the economy and growing fears that inflation could drop too far below the 2% target. The BoC is likely to deliver a 25-bps rate cut in its benchmark interest rate on Wednesday, while the Fed is expected to hold its rates steady on the same day.
Additionally, Trump threatened to impose a 25% tariff on all goods imported from Canada from February 1. This, in turn, contributes to the Loonie’s downside due to its heavy dependence on US trade. "A lot of what has been driving the loonie lately has been the noise out of the White House," said Étienne Bordeleau-Labrecque, Portfolio Manager at Ninepoint Partners.
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.