USD/CAD slides to 15-month low as rising Oil prices and BoC outlook lift the Loonie
- USD/CAD slides to its lowest level in over a year as the Canadian Dollar extends gains.
- Geopolitical tensions in the Middle East lift Crude, reinforcing demand for the commodity-linked Loonie.
- BoC-Fed policy divergence keeps downside pressure on the pair.
The Canadian Dollar (CAD) extends its gains against the US Dollar (USD) on Thursday, with USD/CAD sliding to its lowest level since October 2024, as the Loonie draws support from rising Oil prices and a steady Bank of Canada (BoC) monetary policy outlook. At the time of writing, the pair is trading near 1.3500, down nearly 0.40% on the day.
Rising crude prices tend to support the Canadian Dollar, as Canada is one of the world’s largest Oil exporters. Oil prices surged sharply after Washington issued fresh warnings of potential military action against Iran over its nuclear programme, reviving concerns about supply disruptions in the Middle East. West Texas Intermediate (WTI) is trading around $65.90 a barrel, its highest level since September 26, up more than 4% on the day.
The pair remains under pressure even as the Greenback holds broadly steady. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.17, down about 0.17% on the day, after staging a modest rebound the previous day from a dip to four-year lows.
On the data front, US economic releases earlier in the day offered a mixed picture. Initial Jobless Claims edged lower to 209K from 210K in the previous week, but came in above market expectations of 205K.
Nonfarm Productivity rose at an annualized pace of 4.9% in the third quarter, matching both market expectations and the previous reading. Unit Labor Costs fell by 1.9% in Q3, in line with forecasts and unchanged from the prior estimate.
Meanwhile, traders continue to digest the latest monetary policy decisions from both the BoC and the Federal Reserve (Fed) delivered on Wednesday. The BoC left its policy rate unchanged at 2.25%, as widely expected, and reiterated that it remains focused on keeping inflation close to the 2% target, adding that the current policy rate “remains appropriate.”
South of the border, the Fed also kept interest rates unchanged, opting to maintain a cautious, data-dependent approach. Officials acknowledged that economic activity continues to expand at a solid pace but noted that inflation remains "somewhat elevated" and that uncertainty around the outlook is still high.
Looking ahead, relative monetary policy expectations are likely to keep downside pressure on USD/CAD, with interest-rate swaps pricing in around a 44% probability of a 25-basis-point BoC rate increase to 2.50% over the next twelve months. By contrast, markets expect the Fed to deliver two rate cuts later this year.
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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