- USD/CAD loses momentum to near 1.4430 in Tuesday’s late American session.
- New tariffs on Canadian steel and aluminum will be 25%, not 50%, the White House said.
- The BoC is expected to deliver a 25 basis points (bps) interest rate cut at its March meeting on Wednesday.
The USD/CAD pair trades in negative territory around 1.4430 during the late American session on Tuesday. Uncertainty surrounding the US President Donald Trump administration’s trade policy and US recession concerns continue to undermine the US Dollar (USD) against the Canadian Dollar (CAD). Traders brace for the US February Consumer Price Index (CPI) inflation report and the Bank of Canada (BoC) interest rate decision on Wednesday.
Trump reversed his decision to double tariffs on Canadian steel and aluminum to 50%, which he announced late Tuesday. The White House confirmed to Reuters that new 25% tariffs on all imported steel and aluminum will still go into effect on Wednesday, including against allies and major US suppliers Canada and Mexico.
The US Dollar Index (DXY), a measure of the USD’s value relative to its most significant trading partners’ currencies, declines to new multi-month lows near 103.20 amid the likelihood of a US economic slowdown. The US February CPI inflation report will be in the spotlight on Wednesday. The headline CPI inflation is expected to cool down in February after accelerating in January. If the report shows a softer-than-expected outcome, this could exert some selling pressure on the Greenback against the CAD in the near term.
On the Loonie front, financial markets put the odds of another quarter-point rate cut this week at around 80%, according to LSEG data. That would bring the policy rate to 2.75% from 3.0%. Investors expect at least two further reductions by the end of 2025. The rising speculation of further BoC rate reductions could undermine the CAD and help limit the pair’s losses.
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.
