Concerns Over Economic Impact
USD/CAD has declined for four consecutive sessions, currently standing around 1.3860 amidst a weakening US Dollar influenced by recession concerns and ongoing inflation. Trade tensions between the US and China further burden the dollar, with China announcing a tariff increase on US goods from 84% to 125%.
US economic data reflects a cautious environment, with the University of Michigan’s consumer sentiment index falling to 50.8 and inflation expectations rising to 6.7%. The Producer Price Index rose 2.7% year-over-year in March, while initial jobless claims increased to 223,000.
Minneapolis Fed President Neel Kashkari expressed concerns regarding the economic impact of trade disputes, noting it as a major hit to confidence. There is cautious optimism following President Trump’s 90-day truce announcement, which may encourage renewed talks and strengthen the Canadian Dollar.
Despite this, the commodity-linked CAD may struggle as Oil prices remain low, currently around $60.70 per barrel due to fears over global growth amid trading tensions. The Canadian Dollar is influenced by factors including interest rates from the Bank of Canada, Oil prices, and the Trade Balance.
The Bank of Canada adjusts interest rates to control inflation within a 1-3% target range, which impacts lending rates and currency strength. Rising Oil prices tend to support the CAD, while lower prices can weaken it, reflecting the relationship between Oil exports and currency value.
Impact on Currency Trading
Inflation trends can also affect the CAD, as higher inflation often leads to increased interest rates, attracting foreign investments. Economic indicators such as GDP, PMIs, and employment statistics hold sway over the currency’s direction, with strong data typically resulting in a stronger Canadian Dollar.
This latest stretch of weakness in USD/CAD, running four daily sessions deep, places the currency pair near 1.3860. What’s fuelling this slide is a broader loss of confidence in the US Dollar, which appears increasingly weighed down by mounting fears of a slowdown in the American economy. Recently, we’ve seen several key data points that paint a cautious picture—most notably a steep drop in consumer sentiment and a pick-up in inflation expectations. The University of Michigan reading fell to its lowest in decades, signalling consumers are bracing for more strain ahead, while inflation expectations jumped to 6.7%, escalating concerns that price pressures may become entrenched.
At the same time, producer prices for March pointed to persistent cost pressures, rising 2.7% from a year earlier. Initial jobless claims pushed higher too, hitting 223,000, the highest in a few months, which only added to market jitters. These numbers together provide a somewhat fragile outlook, suggesting that policymakers might find themselves caught between sluggish growth and sticky inflation.
On the geopolitical front, tensions between Washington and Beijing have escalated again—with China’s decision to lift tariffs on US imports sharply from 84% to 125%, it certainly adds another layer of pressure on already-strained trade dynamics. The remarks from Kashkari explicitly reference how trade fights are hammering confidence among decision-makers, not just in boardrooms but across broader economic participants. When those who typically drive investment begin to hesitate, it tends to ripple outwards with visible market reaction.
Interestingly, there’s been some optimism injected into the mix, albeit with a cautious tone, following news of a temporary 90-day suspension of tariff increases. While that may allow negotiations some breathing room, it remains to be seen whether both parties will use the window to move toward a more lasting solution. In the meantime, any progress—or lack thereof—has direct policy and risk implications that we need to monitor closely.
Turning attention to the Canadian side, the Loonie would normally benefit from such weakness in its southern counterpart. However, its recent backing comes with asterisks. It is true that an improved trade dialogue between two of Canada’s primary partners would tend to stabilise external demand and support the currency. Still, there’s a contrasting thread running through: low Oil prices. Sitting near $60.70 per barrel, Oil remains subdued, and for a commodity-backed currency like the CAD, that’s not just a side note—it’s a dominant influence.
The Bank of Canada’s course of action, particularly with respect to interest rate movements, is another determining factor for directional trades. The central bank’s primary mandate is to anchor inflation within its 1-3% band. Any deviation tends to shift the forward track for interest rates. Currently, with inflation ticking higher, pressure may be building for a tighter policy approach, assuming employment data, GDP figures, and business activity indicators (like PMIs) offer enough justification. If so, we should expect higher rates to strengthen demand for the Canadian Dollar, especially among yield-seeking investors.
Nevertheless, sustained Oil weakness could counter these rate-driven gains. Given the tight historical link between crude exports and CAD performance, further softness in Oil pricing would probably temper any bullish runs in USD/CAD, even in the face of rising Canadian yields. What’s essential here is the multi-variable nature of this currency pair. It’s not enough to look at one driver—we need to continuously weigh domestic economic signals, interest rate differentials, and commodity price trends in tandem.
As for how this affects position-taking and risk calibration in the short term, staying alert to scheduled economic prints from both countries should top the list. Employment numbers, business sentiment readings, and consumer data will offer updated insight into whether current trends are losing pace or setting up for acceleration. Also, corporate earnings and global risk appetite can shift the needle, particularly on days lacking headline economic releases.
It may also be worthwhile to watch how rate expectations evolve from market-implied pricing. Any change in probability for Bank of Canada action versus Federal Reserve strategy can rapidly impact cross-border flows and generate volatility. Tight stop-loss and frequent reassessment of directional bias may be prudent, especially during overlapping North American and European hours, when liquidity is deeper and moves often more sustained.
