- Even with mutual tariffs, the US dollar has outpaced the Canadian dollar. The momentum is driven by stronger US growth, differing interest rates, and Canada's greater reliance on US market
- Tariffs will likely spark some short-term volatility for the USD/CAD pair, but they probably won't be the only thing influencing its direction over the medium term
- To understand the pair's next move, traders ought to watch for negotiation signals, central bank policy, inflation figures, and oil prices.
Canada and the United States are in a trade dispute. The U.S. put a 50% tariff on about $20 billion of Canadian goods. Canada plans to respond by implementing similar duties on over 700 American products starting September 8.
Despite these actions, the USD/CAD currency pair has remained fairly steady, the U.S. dollar holding strong against its Canadian counterpart.
This might seem unexpected. You’d think mutual economic harm would lead to both currencies losing value. But currency market reactions to conflict are complex.
Why Is the USD Winning Despite Retaliation?
Several factors explain the U.S. dollar’s resilience. First off, America’s economy is much larger than Canada’s. Since over 75% of Canadian exports go to the United States, trade disruptions hit Canada’s economic growth harder than America’s.
While these tariffs only affect about 5% of Canadian shipments, they still raise worries about growth, business investment, and general confidence.
Secondly, interest rate differences continue to favor the U.S. dollar. The Bank of Canada has maintained its policy rate at 2.25%, while the Federal Reserve’s target range is higher, at 3.50%-3.75%.
In recent months, markets have sensed the Federal Reserve taking a more cautious stance than the Bank of Canada. This has pushed capital into higher-yielding U.S. assets.
Fluctuations in oil prices have offered some support to the Canadian dollar. However, news about ongoing trade tariffs and the risk premium they bring have largely driven short-term currency moves.
What Should Traders Watch Near-Term?
Traders watching this situation should keep an eye on official announcements about Canada’s tariff list and any U.S. retaliatory measures. They’ll also need to see if the Bank of Canada points to trade tariffs as a specific risk to economic growth.
Crude oil prices matter too. West Texas Intermediate (WTI) crude prices are a major secondary influence on the Canadian dollar. A downturn in energy markets could weaken the CAD’s commodity backing.
Even with news of 50% tariffs, the USD/CAD pair hasn’t seen a strong upward trend. This hints that markets view the situation as manageable, not critical, at least for now.
Tariffs might cause some short-term market swings. But in the medium term, relative economic growth, central bank decisions, and oil prices will likely have more sway.
The US dollar has strengthened due to stronger US growth, favorable interest-rate differences, and Canada’s greater dependence on US trade. These factors have provided more support than retaliatory measures have taken away.
Traders should watch Canada’s retaliatory tariffs, which are set for September 8. This will show if the trade dispute remains limited or if it intensifies.
