Market Data 
- USD/CAD gains ground to around 1.4320 in Monday’s late American session.
- Trump tariff threats weigh on the Canadian Dollar.
- Investors brace for Fed Chair Jerome Powell’s semi-annual testimony on Tuesday.
The USD/CAD pair gathers strength to near 1.4320 during the late American session on Monday. The US Dollar (USD) edges higher amid economic uncertainty and tariff concerns. Federal Reserve (Fed) Chair Jerome Powell’s semi-annual testimony will take center stage later on Tuesday.
Trump stated on Sunday that he plans to impose 25% tariffs on all steel and aluminum imports into the US, on top of existing metals duties. This move came after he said on Friday he plans to announce reciprocal tariffs on many countries by Monday or Tuesday, without specifying which countries.
The concerns about the impact of any new trade levies exert some selling pressure on the commodities-linked Loonie as Canada is a major exporter of steel and aluminium to the US.
Traders anticipate the Fed will cut interest rates j just one time this year, down from earlier bets on two rate cuts starting in June, after the report showed that the labor market remains strong and a closely-watched survey showed an increase in consumers’ inflation expectations.
Fed’s Powell is set to testify before the Senate Banking Committee on Tuesday and to the House Financial Services panel on the following day. The cautious stance of the Fed is likely to underpin the USD against the Canadian Dollar (CAD).
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.
