Canadian Dollar hangs near April 2025 lows as USD sticks to bullish tone amid hawkish Fed
- USD/CAD sticks to a positive bias and remains close to the year-to-date high, set earlier this week.
- The CAD underperforms amid weak oil prices, US-Canada tensions, and the BoC-Fed divergence.
- Geopolitical risks and elevated US bond yields underpin the USD, further supporting spot prices.
The USD/CAD pair retains its bullish undertone on Thursday, trading around the 1.4265 region during the Asian session, well within striking distance of the highest level since April 2025, touched earlier this week. Moreover, the supportive fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside and backs the case for an extension of a one-month-old strong uptrend.
The Canadian dollar (CAD) has been underperforming due to heavy US-Canada trade tensions, a sluggish domestic economy, and the Bank of Canada's (BoC) predominantly dovish policy stance. In fact, traders seem convinced that the BoC has less reason to raise interest rates than the US Federal Reserve (Fed), as Canada’s weaker economic outlook could contain broader inflationary pressures. Meanwhile, crude oil prices hang near a one-month low as easing supply concerns counter geopolitical uncertainties, further undermining the commodity-linked Loonie and acting as a tailwind for the USD/CAD pair amid a bullish US Dollar (USD).
The USD Index (DXY), which tracks the Greenback against a basket of currencies, sits near an 18-month top amid bets that the US central bank will raise borrowing costs by the year-end, bolstered by Wednesday's hawkish FOMC Minutes. Adding to this, elevated US bond yields and the risk of a further escalation of tensions in the Middle East benefit the safe-haven buck. In the latest developments, the Pentagon reportedly told US Central Command (CENTCOM) several days ago to conclude preparations for resuming major combat operations in Iran as US President Donald Trump weighs a specific date for launching strikes.
US and Israeli sources said that US attacks could happen before the US midterm elections and possibly the Israeli elections a week earlier. Furthermore, the Saudi-led coalition said it retaliated against the Houthis on Wednesday and attacked more than 80 Houthi military sites across the governorates of Saada, Hodeidah, Jawf and Marib. This, in turn, favors USD bulls, which, along with the divergent BoC-Fed policy outlooks, validates the near-term constructive outlook for the USD/CAD pair.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair is in a clearly bullish near-term structure above the 1.4245-1.4250 congestion zone. That said, the Relative Strength Index (14) at 72.5 stretches into overbought territory, suggesting strong but potentially overextended upside momentum after the latest leg higher. Any corrective pullback, however, could find decent support near last Friday's swing low, around the 1.4200 round figure. Meanwhile, a convincing break below might prompt some technical selling and drag the USD/CAD pair to the 1.4150-1.4145 region.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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