- USD/CAD grips gains near a fresh four-year high at 1.4245 as the US Dollar performs strongly.
- The Fed is widely anticipated to cut interest rates by 25 bps on Wednesday.
- The Canadian economic outlook has weakened amid worries over likely import tariffs by US Trump.
The USD/CAD pair holds gains near a fresh more than four-year high at 1.4245 in Friday’s European session. The Loonie pair strengthens as the US Dollar (USD) performs strongly against its major peers on expectations that the Federal Reserve (Fed) could pause its policy-easing cycle in January after cutting interest rates by 25 basis points (bps) to 4.25%-4.50% in the policy meeting on Wednesday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, climbs above 107.00.
According to the CME FedWatch tool, the Fed is certain to cut interest rates on Wednesday, but there is an almost 75% chance that it will keep rates steady in January’s monetary policy meeting. The major contribution to higher bets supporting the Fed taking a steady interest rate decision in January has come from signs that the disinflation process has stalled.
The United States (US) core Consumer Price Index (CPI) – which excludes volatile food and energy prices – has remained steady at 3.3% since September after accelerating from 3.2% in August. Meanwhile, the annual US headline Producer Price Index (PPI) has accelerated at a faster-than-expected pace to 3% in November, the highest level seen since March 2023.
Meanwhile, the Canadian Dollar (CAD) underperforms against the US Dollar for almost three months as the Bank of Canada (BoC) is easing its monetary policy aggressively. The BoC slashed its borrowing rates by 50 bps to 3.25% on Wednesday, as expected, but guided a more gradual easing approach as policy rates have come down significantly.
After the policy decision, BoC Governor Tiff Macklem warned that US President-elect Donald Trump’s tariffs on their exports will have a significant impact on the economy.
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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