Canadian Dollar bets coil ahead of central bank double-header

The Canadian Dollar stuck to familiar levels on Tuesday.
The Bank of Canada and the Federal Reserve are both due this week.
The Loonie’s rate differential is set to widen further, limiting bullish odds.

Joshua Gibson FXStreet

The Canadian Dollar (CAD) stuck to familiar levels on Tuesday, treading water as Loonie traders buckle down for the wait to this week’s double-header of key central bank showings. The Bank of Canada (BoC) is broadly expected to cut interest rates yet again on Wednesday, while the Federal Reserve (Fed) is set to stand pat on interest rates for most of the first half of the year.

The BoC’s upcoming rate cut will see the Canadian Dollar’s rate differential against the Greenback widen even further, putting downside pressure on the Loonie. With USD/CAD already testing multi-year highs, further downside pressure on the Loonie will only worsen things.

Daily digest market movers: Tariff threats rule the headlines as traders await Fed and BoC

BoC forecast to drop interest rates another 25 bps on Wednesday.
Fed set to stand pat on rates as central bankers weigh near-term outcomes.
US President Donald Tump reiterated his willingness to use sweeping tariffs to try and force production from other countries into the US.
Possible inflation pressure from tariffs could counter-intuitively make it harder for the Fed to cut rates, despite President Trump declaring his intent to “ask” the Fed to lower rates.

Canadian Dollar price forecast

USD/CAD continues to churn sideways, spiraling around the 1.4400 handle. With price action constrained in the midrange of a lateral channel, technical indicators are drifting back to their medians.

Bids are constrained between 1.4500 and 1.4300,j and a quick break to either direction could kick off a firm new leg of a trend.

USD/CAD daily chart

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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