Canadian Dollar weakens as trade tensions flare and risk appetite fades
- The Canadian Dollar weakens against the USD for the third consecutive day.
- US President Trump extends reciprocal tariff deadline to August 1 and warns of new duties up to 40% on 14 countries.
- Ivey PMI jumps to 53.3, signaling renewed expansion in Canadian business activity.
The Canadian Dollar (CAD) gives up its intraday gains against the US Dollar (USD) on Tuesday, pressured by a stronger Greenback amid renewed trade tensions. Market sentiment turned cautious after US President Donald Trump extended the reciprocal tariff deadline to August 1 from July 9 and warned of sweeping new duties targeting over a dozen countries. The hawkish trade tone lifted demand for the safe-haven US Dollar, weighing on the commodity-linked Loonie.
The USD/CAD pair is ticking higher during the American trading hours. At the time of writing, the pair is trading around 1.3685, hovering near Monday’s high after recovering from an intraday low of 1.3638. The rebound comes as traders digest the latest tariff developments and broader market risk sentiment.
At the same time, the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, is edging higher, trading near 97.70, staging a mild recovery from three-year lows as investors digest the latest US reciprocal tariffs.
Tariff tensions are back in focus after US President Donald Trump posted official letters on his social media platform, Truth, warning of new reciprocal tariffs on 14 countries, including Japan, South Korea, and South Africa. The proposed duties, ranging from 25% to as high as 40%, are set to take effect on August 1 if no trade deals are reached.
However, Canada has not been included in this global tariff extension, thanks to its separate bilateral trade agreement with the United States. That said, Ottawa remains under pressure to conclude a new security and economic partnership deal with Washington by July 21. In the meantime, Canada continues to face existing US tariffs on key exports, including steel, aluminum, automobiles, and fentanyl-related products, which keep trade relations between the two allies under strain.
Adding to the mix, the latest Ivey Purchasing Managers Index (PMI) surprised to the upside, offering a glimpse of strength in Canada’s economic activity. The headline PMI rose to 53.3 in June, up sharply from 48.9 in May, marking the highest reading in four months and indicating renewed expansion. Despite the positive PMI headline, the Canadian Dollar struggled to capitalize, with traders more focused on external headwinds and global risk sentiment.
Looking ahead, all eyes will be on the FOMC meeting minutes, due to be released on Wednesday, which could offer fresh clues on the Federal Reserve’s policy path amid growing global trade tensions. Any sign of caution or delayed rate cuts may further support the US Dollar. On the Canadian side, attention will turn to the monthly employment report on Friday, which will provide insight into the health of the domestic labor market.
Canadian Dollar FAQs
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.
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.
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.
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.
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.