The USD/CAD pair experienced upward movement, reaching approximately 1.4275 during Wednesday’s late American trading session. This followed President Trump’s announcement of a proposed 10% baseline tariff across all imports. The reciprocal tariff policy, coupled with declining crude oil prices, exerted downward pressure on the Canadian Dollar.
The USD/CAD pair attracted buyers near the 1.4275 level, interrupting a two-day losing streak. The Canadian Dollar weakened against the US Dollar as market participants reacted cautiously to President Trump’s signing of a reciprocal tariff policy. While Canada and Mexico were initially exempted from the baseline tariff and reciprocal levies, the 10% tariff would be implemented upon termination or suspension of the existing 25% duties imposed on Canadian and Mexican imports, which were based on concerns regarding drug trafficking and crime.
Canadian Prime Minister Mark Carney indicated that Canada would respond to the tariffs with countermeasures, raising concerns about a potential trade war. Declining crude oil prices, driven by fears that a global trade war could reduce demand, further weighed on the commodity-linked Canadian Dollar. Canada is a major oil exporter to the United States, and lower crude oil prices typically negatively impact the CAD’s value.
Key factors influencing the Canadian Dollar include interest rates set by the Bank of Canada (BoC), oil prices (Canada’s largest export), the overall health of the Canadian economy, inflation rates, and the trade balance (the difference between exports and imports). Market sentiment, specifically risk appetite, also plays a role, with risk-on sentiment generally supporting the CAD. The health of the US economy, Canada’s largest trading partner, is another significant factor.
The Bank of Canada significantly influences the Canadian Dollar through its control over interest rates, which affects borrowing costs across the economy. The BoC’s primary objective is to maintain inflation within a 1-3% target range by adjusting interest rates. Relatively higher interest rates tend to strengthen the CAD. The BoC can also employ quantitative easing or tightening to influence credit conditions, with the former typically weakening the CAD and the latter strengthening it.
Oil prices are a crucial determinant of the Canadian Dollar’s value, given that petroleum is Canada’s largest export. Rising oil prices generally lead to an increase in the CAD’s value due to increased demand for the currency. Conversely, falling oil prices tend to weaken the CAD. Higher oil prices also increase the likelihood of a positive trade balance, further supporting the CAD.
While traditionally viewed as a negative factor for currency value, higher inflation in modern economies often leads central banks to raise interest rates, attracting capital inflows from global investors seeking higher returns. This increased demand for the local currency, in this case the Canadian Dollar, strengthens its value.
Macroeconomic data releases, reflecting the health of the Canadian economy, can impact the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment figures, and consumer sentiment surveys can all influence the CAD’s direction. A strong economy typically supports the Canadian Dollar, attracting foreign investment and potentially prompting the Bank of Canada to raise interest rates. Conversely, weak economic data is likely to weaken the CAD.
