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22 Apr 2025
USD/CAD remains on the defensive below 1.3850 amid Fed independence fears
- USD/CAD remains under pressure around 1.3835 in Tuesday’s early Asian session.
- Concerns about the Fed’s independence and US economic slowdown drag the US Dollar lower.
- Lower crude oil prices might weigh on the Loonie and cap the pair’s downside.
The USD/CAD pair loses ground to near 1.3835 during the early Asian session on Tuesday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) amid fears of a slowdown in the US and concerns over the Federal Reserve's (Fed) independence.
White House economic advisor Kevin Hassett said on Friday that US President Donald Trump is looking into whether he can fire Fed Chair Jerome Powell. Trump noted in a Truth Social post that the economy would slow unless Powell lowered interest rates immediately. The Greenback faces some selling pressure, hitting a three-year low as traders raise questions about the Fed’s independence.
Additionally, a lack of progress on global trade dents investor confidence. Trade tensions seemed to increase after China warned other nations not to strike any deal with the US that would hurt Beijing. “If uncertainty continues for an extended period of time — meaning multiple quarters — I think that becomes more challenging for corporate earnings and decision-making, and we’ve seen some of that in the earnings season so far,” said Robert Haworth, senior investment strategist at US Bank.
Meanwhile, a fall in Crude Oil prices on signs of progress in talks between the US and Iran could undermine the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.