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5 Mar 2025
USD/CAD tumbles to near 1.4400 amid trade tensions
- USD/CAD attracts some sellers to around 1.4400 in Tuesday’s late American session, down 0.50% on the day.
- Lutnick said Trump may roll back Canada and Mexico tariffs on Wednesday.
- The BoC is expected to cut its interest rate further next week.
The USD/CAD pair extends the decline to near 1.4400 during the late American session on Tuesday. The US Dollar (USD) fell against the Canadian Dollar (CAD) amid concerns about slowing growth and the impact of tariffs on the US economy outweighed any potential boost from new levies on Canada, China and Mexico.
President Donald Trump's 25% tariffs on goods from Canada and Mexico took effect Tuesday, along with a doubling of duties on Chinese goods to 20%. However, US Commerce Secretary Howard Lutnick hinted that Trump may be preparing to pivot on his own tariffs less than 48 hours after imposing them. Investors will closely monitor the developments surrounding further tariff policies, which might trigger the volatility in the major pair.
The rising bets on further interest rate cuts from the Bank of Canada (BoC) might drag the Loonie lower and act as a tailwind for the pair. Investors have priced in roughly 80% odds that the BoC will cut interest rates further next week, according to Reuters. "We now look for the quarter-point pace to continue in each of the next four meetings until July, taking the rate to 2.0 per cent,” said BMO chief economist Douglas Porter.
Meanwhile, a decline in crude oil prices on reports that OPEC+ will proceed with a planned oil output increase in April might weigh on 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.
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.