Canadian Dollar Struggles Amid US-Canada Rate Gap and Trade Tensions

The Canadian Dollar (CAD) has been struggling against its American counterpart due to a widening US-Canada interest rate gap. The Bank of Canada maintained its key policy interest rate at 2.25% earlier this month, while the US Federal Reserve raised its benchmark rate for the first time in over three years by 25 basis points to a range of 3.75%-4.00%. This has weighed heavily on the CAD, with strategists at Scotiabank noting that the renewed widening in US-Canada rate differentials is offsetting the recent surge in crude oil prices.

Adding to this, ongoing US-Canada trade tensions are undermining the commodity-linked Loonie. The US imposed steep 50% tariffs on approximately $20 billion worth of Canadian goods on August 22, while Canada implemented retaliatory tariffs ranging from 15% to 50% on roughly $20 billion worth of US goods on September 8.

However, Fed Chair Kevin Warsh's focus on inflation calmed the recent selloff in the fixed-income market and dragged US bond yields away from multi-year highs. This has kept the US Dollar (USD) on the back foot and acted as a headwind for the USD/CAD pair.