The Canadian Dollar (CAD) experienced volatility on Wednesday, peaking at a five-week high against the US Dollar (USD) before settling back to its opening levels. This movement was influenced by renewed concerns over tariff threats from the US administration.
Tariffs affecting various commodities are causing unease, with potential new tariffs on copper, automobiles, and a proposed additional 20% tariff on crude oil imports from Venezuela. The European Union is also preparing for potential tariffs ranging from 20-25% on goods imported from the US.
Canadian Dollar Performance
The CAD began the day strongly, reaching a low of 1.4235 against the USD, but trends reversed, affecting market confidence. The USD/CAD rate has hovered around the 50-day Exponential Moving Average at 1.4320, reflecting ongoing market congestion.
Several key factors drive the CAD, including interest rates determined by the Bank of Canada (BoC), oil prices, economic health, inflation, and trade balance. Interest rates set by the BoC directly influence the CAD, while fluctuations in oil prices have an immediate effect due to petroleum being Canada’s largest export.
Inflation impacts the CAD as higher rates often encourage capital inflows from global investors, whereas economic data helps gauge financial performance. Strong economic indicators can lead to CAD appreciation, while weak data typically results in depreciation.
Wednesday saw the Canadian Dollar climb to its highest level in five weeks against the US Dollar, only to retreat later, ending the session unchanged. This movement was largely driven by market uncertainty following fresh concerns over possible tariff increases imposed by the US.
Currently, various commodities are at risk of higher tariffs, with copper and automobiles among those potentially affected. Additionally, a new 20% tariff on oil imports from Venezuela has been suggested. Meanwhile, European authorities are preparing their own countermeasures, planning to introduce tariffs between 20-25% on a range of imports originating from the US.
At the start of the day, the CAD showed strength, briefly reaching 1.4235 per USD. However, this momentum faded as the session progressed. At present, the USD/CAD exchange rate remains close to the 50-day Exponential Moving Average, currently sitting at 1.4320. This level has acted as a gravitational point, with price action oscillating around it, suggesting indecision among traders regarding the currency’s next move.
Impact Of Economic Indicators
The strength of the Canadian currency is influenced by multiple factors. Interest rates, determined by the Bank of Canada, play a key role. If borrowing costs rise, the currency is likely to strengthen as higher yields attract investors. Conversely, a rate cut would likely lead to depreciation. With the next monetary policy meeting approaching, market participants will be closely watching any signals on the future path of interest rates.
Beyond monetary policy, the oil market remains a direct driver of the CAD. Given Canada’s role as a major petroleum exporter, fluctuations in crude prices tend to have an immediate effect on the currency. If oil prices continue to rise, this could support further gains. On the other hand, a drop in crude prices would likely weigh on the CAD.
At the same time, traders should monitor broader economic indicators. Inflation tends to influence capital flows, with higher rates attracting foreign investment, boosting demand for the currency. However, weak data, particularly on employment or growth, could spark concerns about economic slowdown, potentially exerting downward pressure.
We are also keeping an eye on changes in trade dynamics. Tariff announcements and geopolitical developments have the potential to disrupt supply chains and impact investor sentiment. If new trade barriers emerge, they could introduce further volatility into currency markets. As a result, we expect price movements to remain reactive to fresh developments, particularly concerning trade negotiations and interest rate expectations.
