- USD/CAD trades cautiously around 1.4300 as Trump threatens 25% tariff increases on Canada.
- Canadian Prime Minister Trudeau reiterated that the government is prepared to respond to Trump’s tariffs if they are announced.
- Investors expect the BoC to cut interest rates by 25 basis points later this month.
The USD/CAD pair trades cautiously near 1.4300 in the European session on Wednesday. The Loonie pair remains under pressure as United States (US) President Donald Trump has suggested 25% tariffs on Mexico and China, which will take effect on February 1. Trump’s tariff announcement has hurt Canada’s economic prospects.
In response to that, Canadian Prime Minister Justin Trudeau said on Tuesday that his government is ready to “respond to all scenarios” if Trump imposes tariffs on Canada, Reuters reported.
The overall appeal of the Canadian Dollar (CAD) remains weak against the US Dollar (USD) amid hopes of a further rise in policy divergence. Investors expect the Bank of Canada (BoC) to cut interest rates by an additional 25 basis points (bps) to 3% at next week’s policy meeting. The BoC’s dovish bets have accelerated after the release of December Consumer Price Index (CPI) data, which showed annual headline inflation slowing to 1.8%.
In contrast, the Federal Reserve (Fed) is expected to hold interest rates in place over the next three policy meetings, according to the CME FedWatch tool.
USD/CAD has been trading in a tight range of 1.4260-1.4465 for over a month. The Loonie pair’s outlook remains firm as the 50-day EMA tilts higher, trading around 1.4235.
The 14-day Relative Strength Index (RSI) falls in the range of 40.00-60.00, suggesting a sideways trend.
The rally in the Loonie pair could advance towards the round level resistance of 1.4600 and the March 2020 high of 1.4668 if the asset breaks above Tuesday’s high of 1.4518.
Conversely, a move lower below the December 11 low of 1.4120 could drag the asset towards the December 4 high of around 1.4080, followed by the psychological support of 1.4000.
USD/CAD daily chart
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.
