Canadian Dollar falls to one-week low vs USD on divergent BoC-Fed bets, Trump tariffs
- USD/CAD attracts buyers for the second straight day amid a combination of factors.
- Canada’s soft CPI report and fresh US tariffs undermine the CAD amid a bullish USD.
- Elevated crude oil prices help limit losses for the Loonie and cap gains for spot prices.
The USD/CAD pair is seen buying on the previous day's solid rebound from the 1.4000 psychological mark, or its lowest level since June 17, and gaining positive traction for the second straight day on Tuesday. Spot prices climbed to a one-week high, around the 1.4085 region, during the Asian session, though the mixed fundamental backdrop warrants some caution for aggressive bulls.
Against the backdrop of Canada's soft consumer inflation figures, the risk of a fresh US-Canada trade war is seen undermining the Canadian Dollar (CAD). The US Dollar (USD), on the other hand, preserves its recent gains amid a further escalation of tensions in the Middle East and reviving US Federal Reserve (Fed) rate-hike bets. This, in turn, acts as a tailwind for the USD/CAD pair, though elevated crude oil prices offer some support to the commodity-linked Loonie and might cap further gains.
Statistics Canada reported that the country's annual inflation rate unexpectedly slowed to 2.8% in June from 3.2% in May and declined by 0.4% on a monthly basis. Adding to this, the Bank of Canada’s (BoC) preferred core gauges – trim and median Consumer Price Index (CPI) – dropped below the 2% threshold for the first time in nearly six years. The data reaffirmed bets that the BoC will keep rates unchanged through the remainder of 2026. In contrast, traders are pricing in at least one rate hike by the Fed this year.
Meanwhile, US President Donald Trump announced a new tariff of 50% on most Canadian products, covering about $20 billion of goods. Canadian Prime Minister Mark Carney said that Canada is ready to intensify trade talks, though Ontario Premier Doug Ford immediately encouraged Canada to retaliate. This could reignite a trade battle between closest North American allies and top economic partners, which, in turn, is seen weighing on the CAD and supporting the USD/CAD pair amid the underlying USD bullish tone.
That said, renewed US-Iran hostilities and the closure of the Strait of Hormuz keep crude oil prices near the highest level in over a month, which holds back the CAD bears from placing fresh bets. Traders also seem hesitant and opt to wait for further developments surrounding the US-Iran saga, which might continue to infuse volatility in financial markets and around the USD/CAD pair.
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.
