USD/CAD hangs near its lowest level since October 22, seems vulnerable below 1.3800
- USD/CAD remains on the defensive amid the divergent BoC-Fed policy outlooks.
- The overnight recovery in Oil prices underpins the Loonie and weighs on the pair.
- A positive risk tone dents the USD’s safe-haven demand and favors bearish traders.
The USD/CAD pair enters a bearish consolidation phase during the Asian session on Thursday and oscillates in a narrow band, just below the 1.3800 mark, or its lowest level since October 22. The fundamental backdrop, meanwhile, seems tilted firmly in favor of bearish traders and suggests that the path of least resistance for spot prices is to the downside.
The Canadian Dollar (CAD) continues with its relative outperformance against a broadly weaker US Dollar (USD) in the wake of the Bank of Canada's (BoC) hawkish tilt, signaling that the rate-cutting cycle was over. This marks a significant divergence in comparison to rising bets for more rate cuts by the US Federal Reserve (Fed) and validates the near-term negative outlook for the USD/CAD pair.
In a widely expected move, the BoC held its key interest rate at 2.25% on Wednesday on the back of encouraging third-quarter data, which showed that the Canadian economy has withstood some trade war-induced turmoil. Moreover, BoC Governor Tiff Macklem said during the post-meeting presser that the current rate is at about the right level to give the economy a boost through a structural transition.
This comes on top of increasing chatter that a rate hike was likely in the months ahead and helps offset US President Donald Trump's threat that he could impose fresh tariffs on agricultural products, including Canadian fertilizer and Indian rice. Apart from this, the overnight goodish recovery in Crude Oil prices underpins the commodity-linked Loonie and acts as a headwind for the USD/CAD pair.
Meanwhile, the US central bank lowered borrowing costs by 25 basis points and projected one more rate cut in 2026. Traders, however, remained hopeful about two more rate reductions ahead in the wake of Fed Chair Jerome Powell's remarks, saying that the US labor market has significant downside risks. Powell added that the Fed does not want its policy to push down on job creation.
This, along with a generally positive tone around the equity markets, dents the Greenback's safe-haven demand and backs the case for a further near-term depreciating move for the USD/CAD pair. Traders now look to the release of Trade Balance data from the US and Canada, which, along with the USD and Oil price dynamics, should provide some impetus later during the North American session.
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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