USD/CAD struggles to build on modest bounce from two-month low, remains below 1.4200
- USD/CAD attracts some buyers at the start of a new week, though it lacks follow-through.
- Bearish Crude Oil prices undermine the Loonie and act as a tailwind for the currency pair.
- Subdued USD price action holds back bulls from placing aggressive bets around the major.
The USD/CAD pair kicks off the new week on a positive note and reverses a major part of Friday's slide to mid-1.4100s, or its lowest level since December 12. Spot prices, however, struggle to capitalize on the uptick and remain below the 1.4200 round-figure mark through the Asian session.
Crude Oil prices drop to a nearly two-month low amid hopes for a peace deal between Russia and Ukraine, which, in turn, could end sanctions against Russia and ease global supply disruptions. This is seen undermining the commodity-linked Loonie and turns out to be a key factor lending some support to the USD/CAD pair. That said, reduced bets for another rate cut by the Bank of Canada (BoC) in March help limit the downside for the Canadian Dollar (CAD).
Apart from this, the recent US Dollar (USD) decline further contributes to capping the upside for the USD/CAD pair. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, registered hefty losses last week amid easing worries about the potential economic fallout from US President Donald Trump's trade tariffs. Trump directed officials on Thursday to formulate plans for reciprocal tariffs, though he stopped short of announcing levies immediately.
Moreover, Friday's disappointing release of US monthly Retail Sales, which dropped by the most in nearly two years in January, keeps the USD bulls on the defensive. That said, the growing acceptance that the Federal Reserve (Fed) would stick to its hawkish stance amid still-sticky inflation acts as a tailwind for the buck and the USD/CAD pair. The fundamental backdrop, however, warrants caution before positioning for any further gains for the currency pair.
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.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
