USD/CAD holds positive ground near 1.3700 on fresh tariff threats
- USD/CAD trades with mild gains around 1.3690 in Monday’s Asian session.
- Trump’s latest tariff threats brought renewed uncertainty to markets, weighing on the Canadian Dollar.
- The Canadian Unemployment Rate unexpectedly dropped in June to 6.9%.
The USD/CAD pair posts modest gains near 1.3690 during the Asian trading hours on Monday. The Canadian Dollar (CAD) edges lower against the Greenback as US President Donald Trump intensifies the trade war with fresh tariffs on the European Union (EU) and Mexico. The Canadian June Consumer Price Index (CPI) inflation data will be in the spotlight later on Tuesday.
Trump threatened to impose a 30% tariff on the EU and Mexico imports, two of the largest US trading partners, beginning August 1. Last week, Trump also announced a 35% tariff rate for goods imported from Canada, beginning on the same period. The new measures come on top of existing 50% tariffs on Canadian steel and aluminum. This, in turn, could weigh on the Loonie in the near term, as Canada is the largest supplier of both metals to the US.
On the other hand, surprisingly strong Canadian June employment data quash Bank of Canada (BoC) rate cut odds, which might help limit the CAD’s losses. The Unemployment Rate in Canada ticked lower to 6.9% in June from 7.0% in May, according to Statistics Canada on Friday. This figure came in stronger than the 7.1% expected. Meanwhile, the Canadian economy added 83.1K jobs in June versus 8.8K prior. Economists were expecting no change in employment.
The BoC is expected to keep its benchmark interest rate on hold later this month after the labor market delivered a surprise hiring surge in June. Financial markets are now pricing a chance of just 13% for a quarter-point rate reduction at the BoC’s July decision, according to LSEG Data & Analytics.
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.
