USD/CAD holds losses below 1.3950 as Fed policymakers lean toward dovish stance
- USD/CAD falls as the US Dollar weakens after the FOMC Meeting Minutes hint at more rate cuts this year.
- The US government shutdown entered its ninth day with no progress as the Senate again rejected rival funding proposals.
- Trump vowed to treat Canada fairly in talks over US tariffs but was less sure about a broader trade deal.
USD/CAD loses ground after two days of gains, trading around 1.3940 during the Asian hours on Thursday. The pair depreciates as the US Dollar (USD) loses ground after the latest Federal Open Market Committee (FOMC) Minutes from the September meeting suggested policymakers are leaning toward further rate cuts this year.
Most policymakers judged it would likely be appropriate to ease policy further over the remainder of 2025. Some members noted financial conditions suggested policy may not be particularly restrictive. Most participants judged downside risks to employment to have increased, while upside risks to inflation had either diminished or not increased.
The US government shutdown entered its ninth day with no sign of progress, as the Senate on Wednesday once again rejected competing funding proposals from Republicans and Democrats to end the stalemate.
US President Donald Trump on Tuesday pledged to treat Canada fairly in discussions over the US tariffs on Canadian goods, but appeared less certain about reaching a broader trade deal that includes Mexico.
President Trump said in the Oval Office ahead of a meeting with Canada’s Prime Minister Mark Carney, that "I think they're going to walk away very happy." "We're going to treat people fairly. We're going to especially treat Canada fairly," He added. Carney, making his second visit to the White House in five months, faces growing pressure to address US tariffs on steel, autos, and other goods, per Reuters.
The Bank of Canada (BoC) decided to reduce its overnight policy rate by 25 basis points to 2.50% in September, its first reduction after a six-month pause. This cited a weakening economy, easing inflation pressures, and softening labor market conditions. The next policy announcement is scheduled for October 29.
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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