- USD/CAD trades with caution around 1.4300 as Trump threatens 25% tariff hikes on Canada.
- Canada PM Trudeau reiterated that the government is prepared to respond to Trump’s tariffs if announced.
- Investors expect the BoC to cut interest rates by 25 bps later this month.
The USD/CAD pair trades cautiously near 1.4300 in Wednesday’s European session. The Loonie pair remains under pressure as United States (US) President Donald Trump has suggested 25% tariffs on Mexico and China, which will come into effect on February 1. Trump’s tariff announcement has dampened Canada’s economic outlook.
In response to that Canadian Prime Minister Justin Trudeau said on Tuesday that his government is ready to “respond to all scenarios” if Trump imposes tariffs on Canada, Reuters report.
The overall appeal of the Canadian Dollar (CAD) remains weak against the US Dollar (USD) amid hopes of further increase in policy divergence. Investors expect the Bank of Canada (BoC) to cut interest rates further by 25 basis points (bps) to 3% in next week’s policy meeting. BoC dovish bets have accelerated after the release of the Consumer Price Index (CPI) data for December, which showed that the annual headline inflation decelerated to 1.8%.
On the contrary, the Federal Reserve (Fed) is expected to keep interest rates in the next three policy meetings, according to the CME FedWatch tool.
USD/CAD trades in a tight range of 1.4260-1.4465 for over a month. The outlook of the Loonie pair remains firm as the 50-day Exponential Moving Average (EMA) slopes higher, which trades around 1.4235.
The 14-day Relative Strength Index (RSI) falls into the 40.00-60.00 range, suggesting a sideways trend.
The rally in the Loonie pair could advance to near the round-level resistance of 1.4600 and Mar 2020 high of 1.4668 if the asset breaks above Tuesday’s high of 1.4518.
On the contrary, a downside move below the December 11 low of 1.4120 could drag the asset towards the December 4 high of around 1.4080, followed by the psychological support of 1.4000.
USD/CAD daily chart
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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