USD/CAD rises to near 1.4350 amid escalating trade war concerns

USD/CAD appreciates as Trump announced plans to impose a 25% tariff on all steel and aluminum imports.
The Canadian Dollar faces challenges as Canada is a major supplier of steel and aluminum to the US.
The US Dollar gained support after January’s job report heightened the cautious mood surrounding the Fed’s policy outlook.

The USD/CAD pair breaks its four-day losing streak, trading around 1.4350 during the Asian session on Monday. This upside movement could be attributed to escalating trade tensions following recent remarks from US President Donald Trump.

President Trump told reporters aboard Air Force One on Sunday that he plans to impose a 25% tariff on all steel and aluminum imports, without specifying the affected countries. Trump also stated that additional reciprocal tariffs would be unveiled by midweek and implemented almost immediately, mirroring the tariff rates set by each country, according to Reuters.

The Canadian Dollar (CAD) faced downward pressure as Canada is a major supplier of steel to the United States (US). Furthermore, Canada, with its abundant hydropower resources, accounted for 79% of total US primary aluminum imports in the first 11 months of 2024.

"Canadian steel and aluminum support key industries in the US, from defense to shipbuilding and auto manufacturing," Canadian Innovation Minister François-Philippe Champagne posted on X. "We will continue to stand up for Canada, our workers, and our industries," per Reuters.

On Friday, the Canadian Dollar gained ground after stronger-than-expected employment data for January, causing USD/CAD to pull back. The Canadian labor market showed resilience, adding 76,000 jobs in January—far surpassing the expected 25,000, though still below December’s 91,000. The unemployment rate dropped to 6.6%, beating forecasts of 6.8% and improving from the previous 6.7%.

Meanwhile, January’s jobs report in the US indicated slowing job growth but a lower unemployment rate, which increased the likelihood of the US Federal Reserve (Fed) keeping interest rates steady this year. This supported the US Dollar (USD) and limited the downside for the USD/CAD pair.

US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls (NFP) rose by 143,000 in January, significantly below December’s revised figure of 307,000 and below market expectations of 170,000. However, the unemployment rate edged down to 4% in January from 4.1% in December.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.