Since President Trump’s inauguration, tariffs have been the dominant force shaping the USD/CAD exchange rate. Yet, it wasn’t long ago that interest rates and inflation were the primary market movers. Now, much like a parent torn between two wailing children, the USD/CAD currency pair is being pulled back and forth between the demands of inflation and trade tensions, with no easy resolution in sight.
Tariffs
The Canadian dollar and investors are becoming accustomed to the constant announcements of tariffs and potential tariffs from the Oval Office.
Mexico, Canada, and most recently, Australia have all provided off-ramps to President Trump, who has accepted them in exchange for largely symbolic concessions, leaving fundamental trade dynamics unchanged.
While President Trump has announced 25% tariffs on steel and aluminum imports—posing serious consequences for Canadian and American workers in various industries—this remains a far cry from a blanket tariff on all imports.
As a result, the likelihood of broad tariffs has diminished—a relief for markets and a stabilizing factor for the Canadian dollar. That being said, leading up to the March 1st expiry of temporary tariff relief, expect more off-the-cuff remarks from the President as he ramps up pressure.
Interest Rates and Inflation News
The U.S. Labor Department reported on Wednesday that consumer prices rose 0.5% last month from December on a seasonally adjusted basis. This marks the largest monthly increase since August 2023, surpassing economists’ expectations of a 0.3% rise. Inflation has now reached 3%.
As a result, the Federal Reserve is unlikely to cut interest rates in the U.S. anytime soon. Meanwhile, with the Bank of Canada expected to continue rate cuts, the interest rate differential between the two banks will widen further. This divergence will attract more investment into the U.S. economy and strengthen the U.S. dollar, as capital typically flows to markets with higher returns. For the Canadian dollar, this means potential downward pressure unless domestic economic factors counteract it.
Conclusion
Much like a weary parent tiptoeing out of one room only to hear the second child start crying from a different bedroom, the Canadian dollar is caught between inflation and trade tensions. While inflation demands immediate attention, tariffs lurk in the background, poised to disrupt the market once more. Either way, the Canadian dollar (and the parent) is in for a long, long night, with no easy resolution in sight.
The Canadian dollar is currently trading at 1.4287 CAD against the US Dollar.
