USD/CAD holds positive ground above 1.4400 as Fed holds rates steady
- USD/CAD edges higher to around 1.4420 in Wednesday’s late American session.
- The Fed decided to leave its overnight borrowing rate unchanged in a range between 4.25%-4.50% on Wednesday.
- The BoC reduced the policy rate by 25 bps to 3.0%, announced end of quantitative tightening.
The USD/CAD pair gains ground to around 1.4420 during the late American session on Wednesday. The US Dollar (USD) strengthens broadly after the US Federal Reserve (Fed) left interest rates steady as widely expected but gave scant clues about further reductions in borrowing costs this year.
The US central bank held its overnight borrowing rate in a range between 4.25%-4.50% at its January meeting on Wednesday, as widely anticipated. The Fed's decision came after three consecutive cuts since September 2024 worth a full percentage point. This was the first Fed meeting after US President Donald Trump took office.
Fed Chair Jerome Powell said during the press conference that the central bank would need to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.” The cautious stance of the Fed provides some support to the US Dollar against the Canadian Dollar (CAD).
On the Loonie front, the Bank of Canada (BoC) cut its key policy rate by 25 basis points (bps) to 3.0% on Wednesday. The Canadian central bank also announced its plan to complete the normalization of its balance sheet and end quantitative tightening. The BoC added that a tariff war triggered by the United States could cause major economic damage.
“The potential for a trade conflict triggered by new U.S. tariffs on Canadian exports is a major uncertainty. This could be very disruptive to the Canadian economy and is clouding the economic outlook,” said BoC governor Tiff Macklem on Wednesday. The concerns about trade conflict that would hurt economic activity in Canada might continue to undermine the CAD and create a tailwind for the pair in the near term.
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.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
