USD/CAD posts modest gains above 1.4250 on tariff concerns
- USD/CAD gains ground to around 1.4260 in Monday’s late American session.
- The downbeat US PMI weighs on the US Dollar, but escalating trade tension might cap its downside.
- Trump said tariffs on Canada and Mexico ‘will go forward’.
The USD/CAD pair trades with mild gains near 1.4265 during the late American session on Monday. The Consumer Confidence gauged by the Conference Board will take center stage on Tuesday. Also, the Federal Reserve (Fed) Michael Barr, Thomas Barkin and Lorie Logan are set to speak on the same day.
US President Donald Trump said late Monday that sweeping US tariffs on imports from Canada and Mexico “will go forward” when a month-long delay on their implementation expires next week. Trump claimed that the US has “been taken advantage of” by foreign nations and reiterated his plan to impose so-called reciprocal tariffs. His policy pronouncements could weigh on riskier assets like the CAD and create a tailwind for USD/CAD.
The disappointing US economic data, including S&P Global Purchasing Managers' Index (PMI) released last week, kept the prospect of interest rate cuts by the Fed intact this year, even though the US central bank will remain on hold for the next several months. This, in turn, could weigh on the Greenback.
Investors will take more cues from Friday's US Personal Consumption Expenditures (PCE) report. At least speeches from at least nine Fed officials this week will be in the spotlight. The hawkish comment from policymakers could lift the USD against the Canadian Dollar (CAD) in the near term.
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.