- USD/CAD recovers a few pips after touching a fresh weekly low during the Asian session.
- A combination of factors cap the upside ahead of Trump’s reciprocal tariffs announcement.
- The technical setup also warrants some caution before placing aggressive directional bets.
The USD/CAD pair reverses an Asian session dip to sub-1.4300 levels or a fresh weekly low touched during the Asian session on Wednesday, and for now, seems to have stalled the overnight pullback from the 1.4415 area, or a nearly three-week high. Spot prices, however, lack follow-through buying as traders opt to wait on the sidelines ahead of US President Donald Trump's tariffs announcement later today.
In the meantime, worries about the potential economic fallout from US tariffs, amid reports that the Trump administration is considering imposing global tariffs of up to 20% on almost all US trading partners, undermine the Canadian Dollar (CAD). That said, the recent move up in Crude Oil prices offers some support to the commodity-linked Loonie. Furthermore, bets that the Federal Reserve (Fed) will resume its rate-cutting cycle soon keep the US Dollar (USD) bulls on the defensive and cap the upside for the USD/CAD pair.
From a technical perspective, spot prices showed some resilience and bounced off the 100-day Simple Moving Average (SMA) support. This, along with neutral oscillators on the daily chart, makes it prudent to wait for a sustained break and acceptance below the 1.4300 mark before placing bearish bets around the USD/CAD pair. The subsequent slide has the potential to drag spot prices towards last week's swing low, around the 1.4235 region, which if broken decisively will be seen as a fresh trigger for bearish traders.
The USD/CAD pair might then turn vulnerable to prolong its downtrend below the 1.4200 mark, towards testing the year-to-date low, around the 1.4150 region touched on February 14.
On the flip side, any further move up is likely to confront some resistance near the 1.4350 area, above which a bout of a short-covering move should allow spot prices to reclaim the 1.4400 round figure. Some follow-through buying should pave the way for additional gains and lift the USD/CAD pair towards the 1.4440 intermediate hurdle en route to the 1.4480 region, the 1.4500 psychological mark, and the monthly swing high, around the 1.4545 region.
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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