USD/CAD recovery stalls below 1.4000 amid generalised USD weakness
- The US Dollar's recovery from 1.3940 loes has stalled below 1.4000.
- Higher Oil prices are providing some support to the Canadian Dollar.
- Strong Canadian GDP data curbed hopes of a BoC rate cut next week.
The US Dollar’s rebound from monthly lows below 1.3940 on Friday has stalled below the 1.4000 psychological level on Monday. The pair is hovering above 1.3980 at the time of writing, but the higher Oil prices and market expectations of immediate Fed rate cuts are keeping upside attempts limited for now.
Oil prices, Canada's main export, are trading higher on Monday, approaching the $60.00 level, as investors welcome news that OPEC+ has agreed to end supply hikes from the first quarter of 2026, amid growing concerns of an oversupply.
Strong Canadian GDP has curbed BoC easing hopes
Beyond that, the Canadian Dollar remains supported by the upbeat Canada Gross Domestic Product (GDP) figures released on Friday. The Canadian economy bounced up with an unexpected strength in Q3, growing at a 0.6% quarterly pace, to retrace a 0.5% contraction in Q2. year-on-year, the GDP grew 2.6%, beating expectations of a 0.5% growth and following a 1.8% year-on-year decline in the previous quarter.
These figures ease pressure on the Bank of Canada (BoC) to lower borrowing costs at its December 10 meeting, which has provided a fresh impulse to the Loonie.
The US Dollar, on the contrary, remains vulnerable amid growing hopes that the US Federal Reserve (Fed) will cut rates by 25 basis points at its next meeting, also on December 10, and also a few more times in 2026. The US Dollar Index, which measures the value of the US Dollar against a basket of currencies, is drifting lower on Monday and has reached fresh two-week lows below 99.30. In this context, the USD/CAD is unlikely to post a significant recovery.
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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