USD/CAD extends upside above 1.4300 as trade fears loom
- USD/CAD gains ground to around 1.4315 in Tuesday’s late American session.
- Fresh tariff concerns and lower crude oil prices drag the Canadian Dollar lower.
- The US CB Consumer Confidence Index fell to 98.3 in February.
The USD/CAD pair extends the rally to near 1.4315 during the late American session on Tuesday. The Canadian Dollar (CAD) amid the fears that US trade tariffs will be implemented. Investors will take more cues from the US New Home Sales and Fedspeak later on Wednesday.
US President Donald Trump said Monday that sweeping US tariffs on imports from Canada and Mexico “will go forward” when a month-long delay on their implementation expires next week. Trump further stated that the US does not need Canadian Crude Oil or lumber products, a statement that runs against a hard wall of decades of trade history. Fresh tariff concerns exert some selling pressure on the Canadian Dollar (CAD) and create a tailwind for the pair.
Additionally, a fall in crude oil prices undermines the commodity-linked Loonie. It's worth noting that Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
On the other hand, US consumer confidence fell the most since August 2021, prompting traders to raise their bets on Federal Reserve (Fed) rate cuts this year. This, in turn, could weigh on the Greenback against the CAD. The US Consumer Confidence declined to 98.3 versus 105.3 prior, according to the Conference Board.
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.