- USD/CAD declines as concerns over slowing economic growth and the impact of newly imposed tariffs weigh on market sentiment.
- US Commerce Secretary Howard Lutnick indicated that Trump might reconsider his tariff policy less than 48 hours after its implementation.
- The Canadian Dollar faces headwinds amid rising expectations of additional interest rate cuts from the Bank of Canada.
The USD/CAD pair continues to decline for the second straight session, hovering around 1.4400 during early European trading hours on Wednesday. The US Dollar (USD) remains under pressure amid rising concerns over slowing economic growth and the impact of newly imposed tariffs. President Trump’s 25% tariffs on Canadian and Mexican goods took effect on Tuesday, alongside a hike in duties on Chinese imports to 20%.
US Commerce Secretary Howard Lutnick suggested in a Fox News interview that Trump may reconsider the tariff policy less than 48 hours after its implementation, indicating potential relief if USMCA rules are followed. However, the New York Times reported that Trump has privately expressed his intent to keep the tariffs in place.
The US Dollar Index (DXY), which measures the Greenback against six major currencies, remains around 105.70. Market sentiment weighs on the USD amid speculation that Trump could soften his stance on tariffs. Investors now turn their focus to key US economic data, including the ISM Services PMI and ADP Employment Change, set for release in the North American session.
Meanwhile, the Canadian Dollar (CAD) faces downside risks, limiting further losses in the USD/CAD pair, as growing expectations of additional interest rate cuts from the Bank of Canada (BoC). According to Reuters, markets have priced in an 80% probability of a BoC rate cut next week. BMO Chief Economist Douglas Porter stated, “We now expect the quarter-point pace to continue over the next four meetings until July, bringing the rate to 2.0%.”
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.
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