USD/CAD rises above 1.4100 as Trump announces to impose a 25% tariff on Canada imports

• USD/CAD rose more than 1% to 1.4178, a level not seen since April 2020.
• The risk-sensitive CAD’s downside is fueled by dampened market sentiment.
• President-elect Donald Trump announced plans to impose a 25% tariff on imports from Canada.

The USD/CAD pair continues to climb, trading near 1.4110 during Tuesday’s Asian session, marking levels last seen in April 2020. The pair has surged over 1%, fueled by weakened market sentiment after President-elect Donald Trump announced plans to impose a 25% tariff on imports from Mexico and Canada, along with a 10% hike in tariffs on all Chinese goods entering the United States (US).

According to Reuters, citing a Canadian source familiar with the matter, US President-elect Donald Trump and Canadian Prime Minister Justin Trudeau had a conversation on Monday night, discussing trade and border security in what was described as a positive exchange. 

Separately, Canada’s Deputy Prime Minister stated that the "Canada-US relationship today is balanced and mutually beneficial, particularly for American workers." However, the statement made no reference to Trump’s threat of imposing tariffs.

A drop in crude Oil prices could pressure the commodity-linked Canadian Dollar (CAD). As the largest Oil exporter to the United States (US), Canada’s currency often moves in tandem with Oil price fluctuations. Lower crude prices typically weaken the CAD.

West Texas Intermediate (WTI), Oil price trades around $69.00 at the time of writing. The decline follows reports that Israel and Lebanon have agreed on terms to resolve the Israel-Hezbollah conflict, according to unnamed senior US officials. This development has contributed to easing geopolitical tensions, weighing on Oil prices.

The US Dollar (USD) remains under pressure following comments from Federal Reserve (Fed) officials on Monday. Federal Reserve Bank of Chicago President Austan Goolsbee indicated on Tuesday that the Fed is likely to continue lowering interest rates toward a neutral stance that neither stimulates nor restricts economic activity. Meanwhile, Minneapolis Fed President Neel Kashkari highlighted that it remains appropriate to consider another rate cut at the Fed’s December meeting, according to Bloomberg.

Despite this, the USD’s downside risks are limited, supported by strong preliminary S&P Global US Purchasing Managers’ Index (PMI) data. These robust figures have strengthened expectations that the Fed may adopt a more gradual approach to further rate cuts.