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Canadian Dollar Struggles Amid Rate Gap and Trade War
Confirmed
In Short: The Canadian Dollar (CAD) is under pressure due to the widening US-Canada rate gap and ongoing trade tensions, keeping USD/CAD bulls in control.
The Canadian Dollar (CAD) has been underperforming against the US Dollar (USD) due to the widening interest rate gap between the two countries, according to FXStreet. The US Federal Reserve raised its benchmark rate by 25 basis points to a range of 3.75%–4.00%, while the Bank of Canada maintained its key policy interest rate at 2.25%.
Strategists at Scotiabank note that the renewed widening in US-Canada rate differentials is weighing heavily on the Loonie. The US central bank's hawkish outlook, signaling one more rate hike this year, and persistent geopolitical uncertainties are driving investors toward the safe-haven USD, favoring USD/CAD bulls.
Canada's status as a major energy exporter is acting as a buffer for the Canadian dollar, with oil prices rising. However, geopolitical uncertainty is creating a powerful counterforce, driving global capital into the USD. The U.S. Dollar Index recently posted its strongest two-day rally since 2022, making it difficult for the Canadian dollar to rally against the USD.
The trade war between the US and Canada, with the US imposing steep 50% tariffs on approximately $20 billion worth of Canadian goods and Canada implementing retaliatory tariffs, is adding to the pressure on the Canadian dollar. The tug-of-war between oil prices and safe-haven demand is keeping the USD/CAD pair in a relatively tight range, with financial markets adjusting expectations for interest rate cuts from the US Federal Reserve.
What's confirmed
- The Canadian Dollar (CAD) has been underperforming against the US Dollar (USD) due to the widening interest rate gap between the two countries, according to FXStreet. The US Federal Reserve raised its benchmark rate by 25 basis points to a range of 3.75%–4.00%, while the Bank of Canada maintained its key policy interest rate at 2.25%.
- Strategists at Scotiabank note that the renewed widening in US-Canada rate differentials is weighing heavily on the Loonie. The US central bank's hawkish outlook, signaling one more rate hike this year, and persistent geopolitical uncertainties are driving investors toward the safe-haven USD, favoring USD/CAD bulls.
- Canada's status as a major energy exporter is acting as a buffer for the Canadian dollar, with oil prices rising. However, geopolitical uncertainty is creating a powerful counterforce, driving global capital into the USD. The U.S. Dollar Index recently posted its strongest two-day rally since 2022, making it difficult for the Canadian dollar to rally against the USD.
- The trade war between the US and Canada, with the US imposing steep 50% tariffs on approximately $20 billion worth of Canadian goods and Canada implementing retaliatory tariffs, is adding to the pressure on the Canadian dollar. The tug-of-war between oil prices and safe-haven demand is keeping the USD/CAD pair in a relatively tight range, with financial markets adjusting expectations for interest rate cuts from the US Federal Reserve.
What's still developing
- The USD/CAD pair oscillates in a narrow band during the Asian session on Friday, trading below the 1.4000 psychological mark or the highest level since August 7, touched earlier this week.
- This keeps the US Dollar (USD) on the back foot and acts as a headwind for the USD/CAD pair.
- The USD/CAD pair a constructive near-term bullish bias following the post-Fed breakout through the 1.3940 confluence – comprising the 100-day Simple Moving Average (SMA) and the 38.2% Fibonacci retracement level.
- For now, the result is a Canadian dollar that is holding up better than many of its peers but still struggling to gain meaningful ground against the U.S. dollar.
- But the strength of the U.S. dollar is preventing a stronger rally.
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- The Canadian dollar (CAD) is once again finding itself pulled in two directions.