- USD/CAD surrenders some of its intraday gains even though the USD Index holds gains around 105.90.
- Trump promised to raise import tariffs by 10% and lower taxes.
- The Fed is expected to cut interest rates by 25 bps while the BoC is estimated to reduce them by 50 bps in December.
The USD/CAD pair gives up half of its intraday gains after facing selling pressure above the key resistance of 1.3950 in the North American session on Tuesday. The Loonie pair surrenders some gains even though the US Dollar (USD) clings to an intraday high, suggesting that the Canadian Dollar (CAD) gains some strength.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, jumps to near 105.90, the highest level seen in more than four months. The USD Index strengthens on improved United States (US) economic and inflation outlook, given that President-elected Donald Trump vowed to raise import tariffs and lower corporate taxes in his election campaign, which will emphasize the need for the Federal Reserve (Fed) to favor a more gradual policy-easing stance.
Currently, the Fed is expected to cut interest rates by 25 basis points (bps) to 4.25%-4.50% in the December meeting, according to the CME FedWatch tool. Going forward, investors will focus on the US Consumer Price Index (CPI) data for October, which will be published on Wednesday.
Meanwhile, the Canadian Dollar bounces back even though the Bank of Canada (BoC) is expected to cut interest rates by 50 basis points (bps) to 3.25% in December. This will be the second 50 bps interest rate cut by the Fed in a row.
USD/CAD trades near the upper boundary of the Ascending Triangle chart pattern on a weekly timeframe around 1.3950. Upward-sloping 20-week Exponential Moving Average (EMA) around 1.3740 suggests a strong uptrend.
The 14-day Relative Strength Index (RSI) hovers near 60.00. Should RSI (14) sustain above 60.00, a bullish momentum will be triggered.
More upside would appear if the asset breaks above the immediate high of 1.3950. The scenario will pave the way for the psychological resistance of 1.4000 and the round-level resistance of 1.4100.
On the contrary, a downside move below the October 29 low of 1.3875 will expose the asset to the October 15 high near 1.3840, followed by the round-level figure of 1.3800.
USD/CAD weekly chart
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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