- USD/CAD regains some positive traction and draws support from a combination of factors.
- The divergent Fed-BoC policy outlook and renewed USD buying act as a tailwind for the pair.
- An uptick in Crude Oil prices fails to benefit the Loonie or hinder a modest intraday move up.
The USD/CAD pair attracts some dip-buyers at the start of a new week and for now, seems to have stalled its corrective slide from the highest level since March 2020 touched last Thursday. Spot prices stick to modest intraday gains through the first half of the European session and currently trade around the 1.4380 region, up less than 0.10% for the day.
The US Dollar (USD) regains some positive traction after Friday's pullback from a two-year top amid the Federal Reserve's (Fed) hawkish shift, signaling that it would slow the pace of rate cuts in 2025. The outlook remains supportive of elevated US Treasury bond yields and turns out to be a key factor acting as a tailwind for the buck. The Canadian Dollar (CAD), on the other hand, continues to be undermined by domestic political development and the Bank of Canada's (BoC) dovish stance.
In fact, the Canadian central bank projected lower growth in the final quarter of this year and added that the possibility of new tariffs on Canadian exports to the US has made the economic outlook more unclear. Adding to this, Statistics Canada reported on Friday that Retail Sales in October were marginally lower than expected and were likely flat in November. That said, an uptick in Crude Oil prices lends some support to the commodity-linked Loonie and might cap the USD/CAD pair.
Traders now look forward to the release of the Conference Board's US Consumer Confidence Index, which, along with the US bond yields, might influence the USD. Apart from this, Oil price dynamics might contribute to producing short-term trading opportunities around the USD/CAD pair. Nevertheless, the fundamental backdrop seems tilted in favor of the USD bulls and supports prospects for an extension of a well-established uptrend witnessed over the past two months or so.
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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