USD/CAD holds gains near 1.4450 on Trump's remarks on tariffs

USD/CAD holds positive ground near 1.4445 in Tuesday’s Asian session, up 0.94% on the day.
Trump said he considered imposing 25% tariffs on Canada and Mexico in February.
Canada’s December CPI inflation will be the highlight later on Tuesday.

Lallalit Srijandorn FXStreet

The USD/CAD pair jumps to 1.4518 before pulling back sharply to 1.4445 during the Asian trading hours on Tuesday. The Canadian Dollar (CAD) weakens on US President Donald Trump's remarks on tariffs on Canada. Later on Tuesday, the Canadian December Consumer Price Index (CPI) inflation data will be in the spotlight.

On Monday, Trump said that he was thinking of imposing 25% tariffs on imports from Canada and Mexico, as both countries were allowing many people to cross the border as well as fentanyl. Trump added that the action could come as soon as early February. “We’re thinking in terms of 25% (levies) on Mexico and Canada because they’re allowing cast number of people” over the border, Trump said.

Furthermore, the Bank of Canada’s (BoC) Business Outlook Survey suggested that overall economic sentiment in Canada remains subdued. Canadian firms see improved demand and sales in the coming year, fueled by rate cuts, but are concerned about the potential risks from promised US trade policies from Trump’s administration.

Investors will keep an eye on Canada’s December CPI inflation data, which is due later on Tuesday. The CPI is estimated to see an increase of 1.8% YoY in December versus 1.9% prior. If the report shows an unexpected upside in inflation, this could lift the Canadian Dollar and cap the upside for the pair.

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

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.

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