- USD/CAD loses ground as a result of a downward correction in the US Dollar.
- The US Dollar Index retreats from its multi-year high of 108.58, reached on Tuesday.
- The commodity-linked CAD receives support from the improving WTI prices.
USD/CAD halts its two days of gains, trading around 1.4370 during the Asian hours on Thursday. This downside of the pair could be attributed to the downward correction in the US Dollar. The US Dollar Index (DXY), which tracks the value of the US Dollar against six major currencies, trades around 108.30 after pulling back from its multi-year high of 108.58, reached on Tuesday.
The Federal Reserve may adopt a more cautious outlook regarding further rate cuts in 2025, signaling a shift in its monetary policy stance. This change reflects uncertainties surrounding potential policy adjustments in light of the anticipated economic strategies of the incoming Trump administration.
Additionally, the USD/CAD pair faces challenges as the Canadian Dollar (CAD) receives support from the improving crude Oil prices, given that Canada is the largest Oil exporter to the United States (US). West Texas Intermediate (WTI) Oil price extends its gains for the fifth successive day, trading around $71.70 per barrel at the time of writing.
Oil prices start the New Year 2025 by gaining ground amid investors returning from holidays cautiously eyed a recovery in China's economy and fuel demand following a pledge by President Xi Jinping to promote growth. On Tuesday, Xi stated that China would implement more proactive policies to promote growth in 2025, according to Reuters.
Looking ahead, the US weekly Initial Jobless Claims and S&P Global Manufacturing PMI for December from both economies will be released later in the North American session.
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.
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