- USD/CAD trades flat near 1.4355 in Tuesday’s early Asian session.
- Investors awaited fresh catalysts for US interest rate policies and potential tariffs under Donald Trump.
- Higher crude oil prices might lift the commodity-linked Loonie, but a cautious Fed stance might cap its upside.
The USD/CAD pair holds steady around 1.4355 on Tuesday during the early Asian trading hours. It’s likely to be a quiet trading session in a holiday-shortened and thin-trading-volume week. Later on Friday, the US December ISM Manufacturing Purchasing Managers Index (PMI) will be in the spotlight.
The Federal Reserve (Fed) lowered interest rates by 25 basis points (bps) at its December meeting, bringing the target interest rate range to 4.25% and 4.5%. The Summary of Economic Projections (SEP) revealed that the Fed officials penciled in just two 25 bps cuts in 2025, down from the four projected in September. The anticipation of fewer cuts in 2025 is likely to lift the Greenback against the Canadian Dollar (CAD) in the near term.
Markets brace for major US policy shifts, including potential tariffs, deregulation, and tax changes, in 2025 once president-elect Donald Trump returns to the White House in January. Last month, Trump said he planned to impose 25% tariffs against Canada and Mexico unless the countries reduce the flow of migrants and fentanyl into the United States. The concerns about the risks of imposing new trade tariffs might weigh on the Loonie and create a tailwind for USD/CAD.
However, the rebound in crude oil prices might help limit the CAD’s losses. It's worth noting that Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive 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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