- USD/CAD weakened following reports that Canada may face the lowest tier of the April 2 US tariffs.
- While President Trump is reportedly considering a three-tiered tariff system, some sources suggest this approach is not yet official.
- Federal Reserve Governor Adriana Kugler reiterated that the Fed’s monetary policy remains restrictive and appropriately positioned.
USD/CAD extends its losing streak for the third consecutive session, hovering near 1.4270 during Wednesday’s Asian trading hours. The pair's decline is driven by a strengthening Canadian Dollar (CAD) following reports from the “Toronto Star” suggesting that Canada may face the lowest tier of the April 2 US tariffs.
US President Donald Trump is reportedly weighing a three-tiered tariff system, though some sources indicate this approach is not yet official. However, it aligns with the government's expectations for the upcoming week.
Additionally, the CAD benefits from rising Oil prices, supported by supply concerns amid escalating Middle East tensions and a sharper-than-expected drop in US crude inventories. West Texas Intermediate (WTI) Oil price remains in positive territory for the third straight day, trading around $69.10 per barrel at the time of writing.
However, the downside of the USD/CAD pair could be limited as the US Dollar (USD) gains support as market caution rises ahead of US President Donald Trump's tariff announcement on April 2. The US Dollar Index (DXY), which tracks the USD against six major currencies, retraced its recent losses from the previous session and is trading around 104.30 at the time of writing.
Additionally, the Greenback finds support from hawkish remarks by Federal Reserve Governor Adriana Kugler. On Tuesday, Kugler emphasized that the Fed’s interest rate policy remains restrictive and well-positioned. Kugler also noted that progress toward the 2% inflation target has slowed since last summer and described the recent rise in goods inflation as "unhelpful."
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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