USD/CAD holds positive ground above 1.3650 amid firmer US Dollar
- USD/CAD strengthens to around 1.3670 in Tuesday’s early Asian session.
- Trump has officially extended his tariff deadline to August 1.
- A firmer US Dollar and lower Crude Oil prices act as a tailwind for the pair.
The USD/CAD pair edges higher to near 1.3670 during the early Asian session on Tuesday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) after US President Donald Trump announced new tariffs set to go into effect on August 1 for some trading partners.
Bloomberg reported late Monday that Trump unveiled the first in a wave of promised letters threatening to impose higher tariff rates on key trading partners, including levies of 25% on goods from Japan and South Korea, and signed an executive order postponing the new duties until August 1.
However, the Prime Minister's Office said on Monday that Canada was not targeted by the global tariffs and has committed to reaching a bilateral agreement with the United States by July 21. While not impacted by the global levies, Canada is nonetheless subject to fentanyl-related US duties. Canada is likewise affected by Trump's tariffs on steel, aluminum, and cars. This, in turn, could weigh on the Canadian Dollar in the near term and create a tailwind for the pair.
Meanwhile, a decline in Crude Oil prices after the Organization of the Petroleum Exporting Countries and allies (OPEC+) agreed to a bigger-than-expected production increase in August might contribute to the commodity-linked Loonie’s downside. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
Traders brace for the release of the FOMC Minutes on Wednesday, as it might offer insight into how Fed officials view the US economy. Any dovish remarks from the Fed policymakers might cap the upside for the USD against the Loonie.
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.
