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1 Apr 2025
USD/CAD strengthens to near 1.4400 amid rising risk aversion
- USD/CAD regains traction to around 1.4390 in Monday’s late American session.
- Trump said that his reciprocal tariffs plan will target all other countries when it is unveiled on Wednesday.
- The swirl of uncertainty surrounding the forthcoming US tariffs weighs on the Loonie.
The USD/CAD pair edges higher to near 1.4390 during the late American session on Monday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) as traders grow risk-averse ahead of US trade tariffs expected to be unveiled on Wednesday. The US March ISM Manufacturing Purchasing Managers Index (PMI) will be in the spotlight later on Tuesday.
US President Donald Trump said that his reciprocal tariff plan will target all other countries when it comes up on Wednesday, adding uncertainty to the much-anticipated trade policy just days before its implementation. Trump denied that the additional tariffs will target just the top 10 or 15 trade partners that have their own import duties on US goods.
The Loonie remains under selling pressure since Trump last week signed a proclamation to implement a 25% tariff on auto imports and pledged harsher punishment on the EU and Canada if they join forces against the US. Canada sends about 75% of its exports to the US, including oil and autos.
On the other hand, a rise in Crude Oil prices might lift the commodity-linked CAD in the near term and create a headwind for USD/CAD. It’s worth noting that Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive 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.