USD/CAD rose to approximately 1.4305 on Wednesday, following President Trump’s announcement of 25% tariffs on auto imports from overseas, effective on April 2. This news, combined with reduced trade-policy uncertainty, strengthened the US Dollar against the Canadian Dollar.
The tariffs are expected to heavily impact Canada, which exports about 75% of its goods, including autos and oil, to the US. The Bank of Canada’s recent Meeting Minutes indicated trade uncertainties led to a rate cut, despite some members arguing for a pause.
Key Factors Affecting The Canadian Dollar
Key factors affecting the Canadian Dollar include interest rates set by the Bank of Canada, oil prices, and macroeconomic data. High oil prices typically strengthen the CAD, while weak economic indicators may lead to depreciation.
The rise in USD/CAD following Trump’s tariff announcement reflects concerns over trade flows and broader economic implications. With a 25% tariff on auto imports from overseas set to take effect in early April, Canada is in a vulnerable position, considering its heavy reliance on exports to the United States. A trade-dependent economy like Canada’s feels pressure when policies from major trading partners shift abruptly.
The Bank of Canada’s recent decision to lower rates was not unanimous, but those in favour pointed to trade policy uncertainty as a primary reason. When uncertainty fades, policy decisions may shift again. This means we’ll need to closely watch whether further economic weakness forces additional cuts or if stabilisation in global trade expectations changes the outlook.
Macroeconomic indicators will be vital in shaping expectations. As always, oil prices play a huge role, given their direct link to the Canadian economy. When energy prices are high, the currency tends to strengthen. If they weaken, the effect is typically the opposite. The last few weeks of movements in crude should not be ignored.
Interest Rate And Inflation Expectations
For traders, movements in interest rates remain one of the clearest drivers. When expectations shift regarding future hikes or cuts, the exchange rate responds. This means upcoming Canadian inflation and labour market data could quickly shift market expectations on the Bank of Canada’s next steps.
While USD strength has been the main driver this week, external economic data holds weight as well. If we see surprises in US growth, employment, or inflation figures, those shifts will influence expectations for Federal Reserve action. Any changes in interest rate differentials will impact relative valuations.
At this stage, the tariff announcement has added another layer of concern for CAD. The implications for trade volumes, potential retaliation, and corporate responses all need to be examined. Over the next few weeks, we will focus on how Canadian policymakers react and whether markets begin pricing in further rate moves because of these developments.
Market participants should keep an eye on scheduled economic data releases and central bank commentary from both sides of the border. Shifts in US-Canada trade policy have already influenced FX markets, and reactions to upcoming data points could dictate direction in the near term.
