USD/CAD gathers strength above 1.3850 as Trump raises tariff on Canada to 35%
- USD/CAD gains traction to around 1.3855 in Friday’s early Asian session.
- Trump signed an order raising tariff rate on Canada from 25% to 35%, the White House said.
- All eyes will be on the US July NFP report, which is due later on Friday.
The USD/CAD pair edges higher to near 1.3855 during the early Asian session on Friday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) after US President Donald Trump raised Canada's tariff to 35%. The US Nonfarm Payrolls (NFP) for July will take center stage later on Friday.
The White House announced late Thursday that Trump has signed an Executive Order increasing the tariff on Canada from 25% to 35%, with the higher tariff set to take effect on August 1, 2025. Earlier, Trump criticized Canadian Prime Minister Mark Carney’s announcement that Canada plans to recognize a Palestinian state, but told reporters it’s “not a deal-breaker” in the trade talks.
The Greenback attracts some buyers in an immediate reaction to the developments surrounding US tariffs on Canada. The attention will shift to the release of the highly anticipated US NFP report on Friday for fresh impetus. US employment data for July could offer some hints about the US labour market conditions and interest rate outlook.
On the other hand, the dovish stance of the Bank of Canada (BoC) might cap the upside for the Loonie. The BoC left its interest rate unchanged at 2.75% on Wednesday, citing resilience in the economy despite the ongoing global trade war brought on by the US. BoC Governor Tiff Macklem said after the policy meeting that the door is still open to lowering rates in the future if necessary. This might weigh on the CAD and create a tailwind for the pair 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.
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.
