The USD/CAD pair extended its upward momentum during Monday’s Asian trading hours, nearing 1.4430, as fears over potential U.S. trade tariffs weighed on the Canadian Dollar (CAD). Despite these pressures, optimism surrounding a potential change in the Canadian government and rising crude oil prices may limit the CAD’s downside.
The U.S. Dollar (USD) gained traction following a robust U.S. employment report, which reinforced expectations that the Federal Reserve (Fed) may take a cautious approach toward rate cuts this year. The U.S. Bureau of Labor Statistics (BLS) reported a stronger-than-expected increase of 256,000 Nonfarm Payrolls (NFP) in December, significantly outpacing the market consensus of 160,000. Additionally, the U.S. Unemployment Rate edged down to 4.1% from 4.2% in November, further bolstering the USD.
Adding to the pressure on the Canadian Dollar, concerns over potential U.S. trade tariffs, particularly pledges made by President-elect Donald Trump to impose tariffs on imports, have weighed heavily on the CAD. “We are assuming that Trump will impose tariffs on Canada this year, which is likely to hurt the loonie,” said Stephen Brown, Deputy Chief North America Economist at Capital Economics.
In response to the looming tariff threat, Canadian Prime Minister Justin Trudeau stated on Sunday that while Canada is not seeking a trade war with the incoming U.S. administration, it will retaliate if tariffs are imposed on Canadian products. On the positive side, rising crude oil prices may provide some support to the CAD, as Canada remains the largest oil exporter to the U.S. and higher oil prices typically boost the value of the Canadian Dollar.
Despite the potential downside risks from trade tensions, the combination of rising oil prices and political optimism could help cushion further declines in the CAD.
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