USD/CAD extends the rally to near 1.4500 as Trump confirms tariffs
- USD/CAD gains momentum to near 1.4490 in Monday’s late American session.
- Trump said that tariffs on Canada and Mexico will go into effect on Tuesday, denting hopes of another reprieve.
- US ISM Manufacturing PMI declined to 50.3 in February vs. 50.9 prior, weaker than expected.
The USD/CAD pair extends its upside to around 1.4490 during the late American session on Monday. The Canadian Dollar (CAD) weakens to near a one-month low against the Greenback as US President Donald Trump was due to place 25% tariffs on Canadian goods, with the exception of a 10% levy on energy goods, by Tuesday.
Trump confirmed on Monday that tariffs on Canada and Mexico would go into effect on Tuesday. Trump had previously reaffirmed the new March date after having initially set it for April. Fresh tariff threats from Trump exert some selling pressure on the Loonie.
Additionally, a fall in crude oil prices on reports OPEC+ will proceed with a planned oil output increase in April and worries that a trade war could hurt the global economy also weigh on the commodity-linked Canadian Dollar. It’s worth noting that Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
On the other hand, the weaker US Dollar (USD) after weaker US economic data might cap the upside for the pair. Data released by the Institute for Supply Management (ISM) on Monday showed that the US Manufacturing Purchasing Managers' Index (PMI) eased to 50.3 in February from 50.9 in January. This figure came in weaker than the expectation of 50.5.
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.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
