- USD/CAD rises to around 1.4500 in Thursday’s late American session.
- Trump reiterates the threat of imposing tariffs on Canada and Mexico on Saturday.
- Fed left rates unchanged and sees no hurry to cut again.
The USD/CAD pair gains momentum to around 1.4500 during the late American session on Thursday. The Canadian Dollar (CAD) remains under selling pressure as US President Donald Trump repeated his threat of tariffs on goods from Canada and Mexico. Later on Friday, the US Personal Consumption Expenditures (PCE), Personal Income/Spending, and the Chicago Purchasing Managers' Index (PMI) will be released.
Trump said late Thursday that the US plans to impose a flat 25% import tax "because of fentanyl" on all goods crossing the border into the US from Canada or Mexico. The announcement of the first Canada and Mexico tariff policies is coming on Saturday.
The potential for a trade conflict triggered by new U.S. tariffs on Canadian exports could weigh on the Loonie and act as a tailwind for USD/CAD. The US and Canada are major trading partners, exchanging $2.7 billion in goods and services across their shared border each day in 2023, according to Canadian government figures.
Additionally, the US Federal Reserve (Fed) left its overnight borrowing rate unchanged in a range between 4.25%-4.50% at its January meeting on Wednesday. Fed Chair Jerome Powell noted that officials are not in a rush to lower interest rates, adding the central bank is pausing to see further progress on inflation following a string of rate cuts in 2024.
Wednesday’s hawkish hold by the Fed could underpin the US Dollar (USD) broadly in the near term. Markets are pricing in a funds rate of about 3.9% by the end of 2025, implying a 61% chance of two-quarter percentage point reductions this year, according to CME Group data.
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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