USD/CAD falls to near 1.3700 due to Fed rate cut bets, higher Oil prices
- USD/CAD falls as the US Dollar (USD) loses ground over expectations of two more Federal Reserve rate cuts in 2026.
- Markets brace for President Trump to nominate a new Fed chair in May, potentially favoring lower interest rates.
- The CAD receives support as Oil prices rise on supply concerns amid geopolitical concerns.
USD/CAD pares recent gains from the previous session, trading around 1.3710 during the Asian hours on Friday. The pair depreciates as the US Dollar (USD) loses ground over expectations of two more Federal Reserve rate cuts in 2026.
Markets are bracing for US President Donald Trump to nominate a new Fed chair to replace Jerome Powell when his term ends in May, a move that could tilt monetary policy toward lower interest rates. Federal Open Market Committee (FOMC) December Meeting Minutes indicated that most participants judged that it would likely be appropriate to stand on further rate cuts if inflation declined over time. Meanwhile, some Fed officials said it might be best to leave rates unchanged for a while after the committee made three rate reductions in 2025 to support the weakening labor market.
The Canadian Dollar (CAD) receives support as the recent Bank of Canada (BoC) communications indicated noncommittal on further tightening, with a growing bias toward holding rates. Statistics Canada reported a 0.3% contraction in real GDP in October, confirming that growth momentum cooled into Q4. S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) for December will be eyed later in the day.
The commodity-linked Canadian Dollar receives support against the US Dollar amid higher Oil prices, given Canada’s status as the largest crude exporter to the United States (US). Oil prices could edge higher on potential supply concerns amid escalating geopolitical tensions.
Ukrainian drones reportedly struck Russian Oil facilities, while Russia and Ukraine exchanged accusations of civilian attacks on New Year’s Day, despite intensive talks overseen by US President Donald Trump aimed at ending the nearly four-year conflict.
Reuters reported that the US Treasury Department announced sanctions on Wednesday against Oil traders accused of helping Venezuela’s Maduro government evade restrictions, including four tankers allegedly part of a so-called “shadow fleet.”
West Texas Intermediate (WTI) Oil price holds ground after registering modest losses in the previous trading session, hovering near $57.60 at the time of writing. Traders are awaiting Sunday’s virtual meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+), with expectations that the group will uphold its November decision to pause further production increases.
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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