USD/CAD trades with positive bias around 1.4300; upside seems limited ahead of Canadian CPI

USD/CAD attracts some buyers on Tuesday, though it lacks follow-through.
An uptick in Oil prices underpins the Loonie and caps the upside for the pair.
Canadian CPI eyed for some impetus ahead of the Fed decision on Wednesday.

Haresh Menghani FXStreet

The USD/CAD pair edges higher during the Asian session on Tuesday and for now, seems to have snapped a two-day losing streak to over a one-week low, around the 1.4275 region touched the previous day. Spot prices now look to build on the intraday move up beyond the 1.4300 round figure, though the fundamental backdrop warrants some caution for bullish traders.

The US Dollar (USD) stages a modest recovery from its lowest level since October 2024 amid some repositioning trade ahead of this week's key central bank event risks, which, in turn, is seen acting as a tailwind for the USD/CAD pair. Any meaningful USD appreciation, however, still seems elusive in the wake of the growing acceptance that the Federal Reserve (Fed) will cut interest rates several times this year.

Meanwhile, Crude Oil prices remain close to a two-week top set on Monday amid the risk of a further escalation of tensions in the Middle East, which could impact supply. This, along with positive news coming out of the US-Canada trade talks last week should underpin the commodity-linked Loonie and contribute to capping the USD/CAD pair, warranting some caution for aggressive bullish traders.

Traders might also refrain from placing aggressive bets and opt to wait for the outcome of the highly-anticipated two-day FOMC policy meeting, scheduled to be announced on Wednesday. In the meantime, traders on Tuesday will take cues from the release of the latest consumer inflation figures from Canada. This, along with second-tier US macro data, should provide some impetus to the USD/CAD pair.

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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