The USD/CAD exchange rate is experiencing a notable strengthening, largely driven by suggestions from advisors to President Trump about imposing a 25% tariff on Canada, potentially effective from February 1. This impending tariff has placed additional pressure on the Canadian Dollar as the Bank of Canada (BoC) is expected to announce a further 25 basis points rate cut in its upcoming meeting. Meanwhile, the US Dollar continues to gain momentum amidst increasing uncertainty surrounding the potential ramifications of Trump’s trade policies.
During the Asian trading session on Monday, USD/CAD rebounded from earlier losses, trading at approximately 1.4390. The rally in the pair is attributed to a report that Trump’s advisors are advocating for quick action on tariffs against both Mexico and Canada without waiting for negotiations. This approach echoes previous instances where the president unilaterally imposed tariffs, indicating a willingness to act swiftly in pursuit of his trade policy goals.
Furthermore, the outlook for the Canadian Dollar appears grim as markets brace for the BoC’s decision to lower interest rates, while the Federal Reserve is expected to maintain its current rates, thereby creating a larger interest rate differential that favors the US Dollar. This differential is compounded by the prevailing uncertainty that Trump’s trade strategies may contribute to the Federal Reserve’s cautious approach to altering interest rates throughout the year.
In related developments, the US Dollar Index (DXY), which tracks the performance of the US Dollar against a basket of major currencies, has recovered from a recent low of 107.22 and is currently trading near 107.60. Economic data released on Friday indicated fluctuations in the US economy, with the Composite PMI dropping to 52.4 in January while the Manufacturing PMI slightly improved to 50.1, surpassing earlier forecasts. Conversely, the Services PMI fell short of expectations, indicating a mixed economic outlook moving forward.
