• USD/CAD weakens due to expectations that Canada's ruling Liberal Party will retain power following Monday’s election.
  • The Liberals have to secure the 172 seats required for a majority in the 343-seat House of Commons.
  • The US Dollar finds support amid signs of easing US-China trade tensions.

The USD/CAD pair remains under pressure for the second straight session, hovering around 1.3820 during Asian trading hours on Tuesday. The pair weakens as the Canadian Dollar (CAD) gains modestly, supported by early election results in Canada.

According to projections by CTV News and CBC, Canada's ruling Liberal Party has retained power following Monday’s election, although it remains uncertain whether they will secure a majority. Prime Minister Mark Carney had sought a strong mandate to manage US President Donald Trump's tariffs and annexation threats. However, CBC reported that the Liberals had yet to secure the 172 seats needed for a majority in the 343-seat House of Commons.

The final outcome may take time to confirm, particularly as results from British Columbia, where polls closed last, could prove decisive. Meanwhile, the right-leaning Conservative Party showed a stronger-than-expected performance, advocating for change after more than nine years of Liberal leadership. If Carney ends up leading a minority government, he will need to negotiate with other parties to maintain power — a situation that historically results in Canadian governments lasting no longer than about 2.5 years.

Despite the CAD’s strength, further downside for USD/CAD may be limited by broader US Dollar (USD) resilience. The USD finds support amid signs of easing US-China trade tensions. US President Donald Trump indicated a willingness to roll back tariffs on China, while Beijing announced tariff exemptions for certain US goods, raising hopes that the prolonged trade war between the world’s two largest economies may be nearing an end.

President Trump noted that progress had been made and that he had spoken with Chinese President Xi Jinping. However, a spokesperson from the Chinese embassy firmly denied any ongoing negotiations, stating, "China and the US are not having any consultation or negotiation on tariffs," and urged Washington to "stop creating confusion."

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.

Source: Fxstreet