Investors have recently bolstered the Canadian Dollar (CAD) against the US Dollar (USD), yet its outlook appears fragile. This comes as former President Donald Trump is set to impose a 25% tariff on Canada and Mexico starting February 1. The Bank of Canada (BoC), which plays a pivotal role in directing the CAD’s trajectory through its interest rate policies, finds itself at the center of this economic storm. Meanwhile, the fluctuating price of Oil, a significant Canadian export, continues to influence the CAD's value. The USD/CAD pair experienced a sharp decline, nearing 1.4320 during Friday’s North American session.
The Bank of Canada exerts substantial influence over the Canadian Dollar through its monetary policy decisions, primarily by setting interest rates that affect borrowing costs between banks. Beyond interest rates, the BoC can employ quantitative easing or tightening to manipulate credit conditions, thereby impacting the economic landscape. Investors are currently anticipating a 25 basis point cut in interest rates next week, which would bring the rate down to 3%. This expected move is aimed at maintaining inflation within the 1-3% target range, a primary goal of the BoC.
The price of Oil remains a critical factor impacting the CAD, as it is Canada's largest export. Higher Oil prices typically lead to a more favorable Trade Balance, which supports the strength of the CAD. However, fluctuations in Oil prices can also introduce volatility. The health of Canada's economy, along with inflation and trade balance metrics, further drives the CAD's performance. A robust economy generally strengthens the Canadian Dollar, while economic downturns can weaken it.
The technical indicators for the USD/CAD pair present a mixed picture. The 14-day Relative Strength Index (RSI) currently resides within the 40.00-60.00 range, indicating a sideways trend without clear direction. Meanwhile, the 50-day Exponential Moving Average (EMA) is on an upward slope, trading around 1.4248. This suggests potential upward momentum for the currency pair. If the asset surpasses the January 21 high of 1.4518, there could be a rally pushing it towards resistance levels near 1.4600 and potentially reaching the March 2020 high of 1.4668.
The looming tariff increase by Donald Trump raises concerns about trade relations between Canada and its largest trading partner, the United States. Such tariffs could potentially lead to increased costs for Canadian exporters, affecting trade balances and exerting downward pressure on the CAD. On the other hand, should Canada successfully navigate these challenges and maintain healthy economic growth, it could bolster investor confidence in the CAD.
The Bank of Canada's forthcoming decision on interest rates will be closely watched by investors and economists alike as it seeks to navigate these complex economic waters. The BoC's approach to managing inflation and fostering economic stability will be pivotal in determining the CAD's path forward. Additionally, any shifts in US economic conditions will also play a significant role in influencing the Canadian Dollar due to the close economic ties between the two nations.