Earlier this March, the University of Michigan announced that 12-month inflation expectations have hit a top in nearly two and a half years. This increase may indicate the start of major changes in economic policy and structural market environments. US President Donald Trump is currently deliberating on whether to impose even higher tariffs on a wider number of countries. Should he proceed, these tariffs are scheduled to be implemented on April 2. In light of these trends, fears have been intensified by the growing probability of a US economic slowdown. The increasing price of oil has a big effect on the CAD. The Federal Reserve (Fed) may resume its rate-cutting cycle, keeping USD bulls on the defensive amid the uncertainty surrounding Trump’s trade policies.
The health of the US economy, one of the most important underlying factors driving the CAD, continues to send mixed signals according to recent data. In February, the US Personal Consumption Expenditure (PCE) Price Index reported a 0.4% increase on its core measure that excludes those typically volatile food and energy prices. This rise to the monthly rate was enough to raise the annual rate to 2.8%. The Bank of Canada (BoC) has an important role to play in determining appropriate interest rates. Its main mission is to maintain inflation at the desired 1-3% band by employing quantitative easing/tightening, as necessary.
Tariff Concerns and Market Reactions
President Trump’s trade policy moves are already causing markets to react strongly. His latest move, to impose a 25% tariff on all non-American cars and light trucks, is adding even greater uncertainty. The expected announcement of reciprocal tariffs on Wednesday has fueled a new risk-off temp. This development is cutting short any downside risks for the safe-haven Greenback.
Market participants continue to be cautious of the potential economic fallout from these bellicose trade policy moves. The USD has seen a selling bias for three consecutive days. They are rightfully concerned with the effects of these policy changes on global growth and international trading relationships. The ambiguity over these policies, in turn, has stoked fears of an economic slowdown in the US spurred by tariffs, contributing to negative market sentiment.
How the Fed responds to these growing pressures is hotly debated, including whether it will have to refill its recently ended rate-cutting cycle. Such a move would help to keep USD bulls on their toes and help promote the current volatile state of play in currency markets.
Oil Prices and the Canadian Dollar
The cost of oil is one of the most important economic conditions affecting the value of the Looney. Elevated oil prices usually help Canada’s trade balance, offering a further boost to the CAD. Canada is the third largest oil exporter to the U.S. High oil prices pump up its economy and cushion the blow of escalating global trade tensions.
Meanwhile, oil prices have been rising in recent weeks, increasing the CAD’s attractiveness to investors. This trend is likely to continue as geopolitical tensions and the longer-term supply constraints remain. Additionally, the BoC’s monetary policy decisions further influence the CAD’s value by adjusting interest rates to stabilize inflation within its target range.
The BoC’s power to pursue both quantitative easing and tightening offers it the means to maintain appropriate credit conditions. Q.E. is CAD-negative because it increases money supply, but tightening can be CAD-positive because a reduction in inflationary pressures is a good thing.
Economic Indicators and Market Outlook
Recent macroeconomic data significantly complicate the picture for investors looking to navigate these volatile currency markets. The University of Michigan’s report on inflation expectations is the latest indication of rising price pressures, which may impact future monetary policy decision-making. With the risk of inflation expectations becoming de-anchored, central banks will be under greater pressure to tighten monetary policy preemptively.
Moving forward, the PCE Price Index will continue to be an important barometer for measuring inflationary trends in the United States. February’s numbers were a 0.4% month-over-month increase in the core gauge, which removes food and energy costs. This increase accounted for a 0.6 percentage point increase in annual rate of 2.8%. Yet these figures highlight the fine line policymakers must walk in trying to control inflation while pursuing economic growth goals.
As markets continue to look for clues on the direction of US trade policy, risk appetite has turned tentative. Increased tariffs and retaliatory measures only compound the uncertainty in international markets. This uncertainty weighs heavily on international currency valuations and shifts the balance of power in international trade.