- USD/CAD weakens to near 1.4055 in the early Asian session on Wednesday.
- Trump’s threat of tariffs puts some selling pressure on the Canadian dollar.
- The FOMC minutes showed officials supported the gradual pace of rate cuts.
The USD/CAD pair is trading with slight losses around 1.4055 during the early Asian session on Wednesday. The Canadian Dollar (CAD) regains some lost ground after hitting a 55-month low as US President-elect Donald Trump promised tariffs on Mexico and Canada and additional tariffs on China.
Donald Trump said he would impose a 25% tariff on imports from Canada and Mexico on January 20 and impose an additional 10% tariff on goods from China. The prospect of substantial tariffs has led traders to be more cautious regarding the currencies of the United States (US) trading partners, dragging the Loonie lower against the Dollar.
Goldman Sachs analyst Isabella Rosenberg said the proposed 25% tariff on Mexican and Canadian imports would represent a significant economic shock to both the Canadian dollar and the Mexican peso.
Minutes from the latest meeting of the Federal Open Market Committee (FOMC) indicated that monetary policymakers are taking a cautious approach to cutting interest rates as inflation is declining and the labor market remains strong. At the November meeting, the Fed decided to lower interest rates by a quarter point to a range of 4.5-4.75%, the second cut in as many meetings. The Fed’s cautious stance could boost the dollar in the short term.
Later on Wednesday, the US Core Personal Consumption Expenditure (Core PCE) Price Index for October will be in the spotlight. Weekly initial jobless claims, pending home sales, Chicago PMI and durable goods orders will also be released.
The Canadian Dollar FAQs
The key factors that determine the price of the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export product, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the risk-on being positive for the CAD. 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) exerts significant influence over the Canadian Dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are usually positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian Dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD also rises, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.
The published macroeconomic data measures the health of the economy and may have an impact on the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can 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 raise interest rates, resulting in a stronger currency. However, if economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
