USD/CAD holds ground near 1.4350, with an upside bias as trade uncertainties persist

USD/CAD may appreciate due to persistent trade uncertainties following China’s 100% tariff on Canadian imports.
Canadian Prime Minister Mark Carney may call an early election, possibly by late April or early May 2025.
The US Dollar struggles amid worries about a potential slowdown in the US economy.

Akhtar Faruqui FXStreet

USD/CAD remains steady after registering gains in the previous session, trading around 1.4360 during the Asian hours on Monday. The Canadian Dollar (CAD) may face headwinds due to ongoing trade uncertainties.

On Saturday, China announced that it will impose a 100% tariff on Canadian rapeseed oil, oil cakes, and peas, along with a 25% levy on aquatic products and pork from Canada. This move, in response to tariffs introduced by Canada in October, intensifies trade tensions and adds another dimension to the broader trade conflict largely driven by Trump's tariff policies. The new tariffs are set to take effect on March 20.

Last week, President Trump’s 25% tariffs on Canadian and Mexican imports took effect. However, on Thursday, a one-month exemption was introduced for goods that comply with North American trade pact standards, providing some relief.

Amidst this backdrop, speculation is growing that Canadian Prime Minister Mark Carney could call an election as early as Monday. While Canada’s next federal election is scheduled for October 20, 2025, an early call remains possible, potentially by late April or early May 2025.

US Commerce Secretary Howard Lutnick stated late Sunday that the 25% tariffs on steel and aluminum imports, scheduled to take effect on Wednesday, are unlikely to be delayed. Ordered by US President Donald Trump in February, the tariffs apply to imports from major foreign suppliers, including Canada and Mexico, and cover finished metal products, according to Bloomberg.

The US Dollar (USD) faces downward pressure due to concerns over a potential slowdown in the United States (US) economy. However, the downside of the Greenback could be limited as the US Treasury yields rise.

The US Dollar Index (DXY), which measures the US Dollar against six major currencies, is losing ground for the fifth consecutive day, is trading around 103.80 with 2- and 10-year yields on US Treasury bonds standing at 3.97% and 4.28%, respectively, at the time of writing.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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