- USD/CAD gains sharply to near 1.4550 as the USD refreshes weekly high on Trump’s tariff threats.
- The Canadian Dollar weakens as US Donald Trump is poised to impose 25% tariffs on Canada on February 1.
- The Fed has stated that it has frozen monetary policy adjustments until it sees some progress in inflation or weakness in the labor market.
The USD/CAD pair climbs to near 1.4550 in Friday’s North American session. The Loonie pair strengthens as investors continue to dump the Canadian Dollar (CAD) amid worries that United States (US) President Donald Trump is poised to slap hefty tariffs on Canada on February 1. Such a scenario will weaken the Canadian economic outlook, given that 75% of total exports from Canada are bought by the US.
On Thursday, Donald Trump reiterated his intensions of imposing 25% tariffs on Canada and Mexico. Trump had been accusing Canada and Mexico of allowing illegal immigrants and the deadly opioid fentanyl to enter the US economy.
On Wednesday, Bank of Canada (BoC) Governor Tiff Macklem said “A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada.” His comments came after the policy decision in which the central bank reduced its interest rates by 25 basis points (bps) to 3% to overcome deepening risks of inflation undershooting their target of 2%
Trump’s tariffs on Canada could result in a stagflation in the economy. Market experts view tariffs as inflationary for Canada as business owners would shift to lower operating capacity, which will result in higher layoffs. Lower productivity will also result in higher costs, which would boost price pressures. The scenario would be discomforting for the BoC.
Meanwhile, the US Dollar (USD) performs strongly as Trump’s tariff threats have improved its safe-haven appeal. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh weekly high near 108.40.
Market participants believe that Trump’s tariffs will be inflationary for the US economy, which will allow the Federal Reserve (Fed) to remain on standby. On Wednesday, Fed Chair Jerome Powell guided a cautious approach on interest rates, saying that monetary policy adjustments will become appropriate only when the committee will see “real progress on inflation or at least some weakness in the labor market”.
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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