USD/CAD trades higher near 1.3850 due to potential de-escalation of ongoing tariff dispute

USD/CAD gains as the US Dollar strengthens after Treasury Secretary Scott Bessent hinted at a potential de-escalation in trade tensions.
The White House also signaled progress in trade talks aimed at easing the broad tariffs introduced earlier this month.
The CAD found support from rising crude Oil prices, driven by sanctions on Iran and a decline in US stockpiles.

Akhtar Faruqui FXStreet

USD/CAD edges higher, rebounding from two consecutive sessions of losses, and is trading near 1.3830 during Asian hours on Wednesday. The US Dollar (USD) found support following remarks by US Treasury Secretary Scott Bessent, who called the ongoing tariff dispute "unsustainable," hinting at potential de-escalation.

On Tuesday, the White House announced progress in trade negotiations aimed at reducing the sweeping tariffs imposed earlier this month. Press Secretary Karoline Leavitt stated that 18 countries have already submitted trade proposals, with President Trump's team set to meet representatives from 34 nations this week to explore possible deals.

However, the USD/CAD pair rally may be limited as the Canadian Dollar (CAD), a commodity-linked currency, gains support from rising crude Oil prices. As the largest Oil exporter to the United States (US), Canada benefits from stronger Oil markets.

Crude prices continued to climb amid new sanctions on Iran, declining US crude inventories, and a more dovish tone from President Trump on the Federal Reserve. Markets also responded positively after Trump softened his stance on Fed Chair Jerome Powell and suggested possible tariff relief for China.

Investors anticipate the Bank of Canada (BoC) will maintain a neutral stance on its monetary policy outlook. The central bank left its benchmark interest rate unchanged at 2.75% last week. Attention now turns to Canada’s February Retail Sales data, scheduled for release on Friday, which could offer further insight into the economic outlook.

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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