USD/CAD hangs near its lowest level since September 17, around 1.3770 area

USD/CAD enters a bearish consolidation phase during the Asian session on Friday.
Weaker Crude Oil prices undermine the Loonie and act as a tailwind for the pair.
The divergent Fed-BoC outlooks back the case for a further near-term depreciation.

Haresh Menghani FXStreet

The USD/CAD pair is seen oscillating in a narrow range during the Asian session on Friday and consolidating its recent heavy losses to the lowest level since September 17, which it touched the previous day. Spot prices currently trade around the 1.3770 region, nearly unchanged for the day, and seem vulnerable to decline further.

The US Dollar (USD) continues with its relative underperformance on the back of dovish Federal Reserve (Fed) expectations. In fact, the US central bank projected just one more rate cut in 2026. However, comments from Fed Chair Jerome Powell lifted bets for more rate cuts next year, which, along with the prevalent risk-on environment, continues to undermine the safe-haven buck and weigh on the USD/CAD pair.

The Canadian Dollar (CAD), on the other hand, benefits from the Bank of Canada's (BoC) hawkish signal that the rate-cutting cycle was over. BoC Governor Tiff Macklem said on Wednesday that the current rate is at about the right level to give the economy a boost through a structural transition. This marks a significant divergence in comparison to the Fed and validates the negative outlook for the USD/CAD pair.

However, this week's steep decline in Crude Oil prices, to the lowest level since October 21, might keep a lid on further gains for the commodity-linked Loonie and help limit losses for the currency pair. Traders now look to speeches from influential FOMC members for some impetus later during the North American session. Nevertheless, the USD and the USD/CAD pair remain on track to register losses for the third straight week.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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