USD/CAD hits five-month lows below 1.3700 due to growing Fed rate cut bets
- USD/CAD hit a five-month low of 1.3675 on Wednesday.
- The US Dollar declines amid growing odds for two Fed rate cuts in 2026.
- Canada’s economy grew 0.1% in November, easing growth concerns after October’s 0.3% contraction.
USD/CAD extends its losses for the third successive session, reaching a five-month low of 1.3675 during the Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) faces challenges amid growing expectations for two rate cuts by the Federal Reserve (Fed) in 2026.
The dovish sentiment was reinforced by President Donald Trump’s calls for lower borrowing costs. Volumes are expected to be thin due to shortened trading hours over the holiday.
White House Adviser Kevin Hassett stated on Tuesday that the Fed is not cutting interest rates quickly enough, despite the US economy growing at a much faster-than-expected pace in the third quarter, according to a CNBC report.
The US Bureau of Economic Analysis (BEA) reported on Tuesday that preliminary US Gross Domestic Product (GDP) Annualized expanded 4.3% in the July–September period. The reading exceeded market expectations of a 3.3% increase and the previous quarter’s 3.8% growth.
US core Personal Consumption Expenditures (PCE) Price Index rose by 2.9% quarter-over-quarter, matching analysts' estimates. In this period, the Gross Domestic Product Price Index was up 3.7%, compared to the market forecast of 2.7%.
The US Dollar may stay under pressure, as analysts warn that strong headline GDP figures may overstate underlying economic health, with growth driven largely by healthcare spending and inventory drawdowns, alongside signs of labor market softening and weaker US consumer confidence in December.
Statistics Canada’s flash GDP estimate showed the economy expanded 0.1% in November, rebounding modestly from October’s 0.3% contraction, easing near-term growth concerns and reducing pressure for immediate policy easing.
Meanwhile, the Canadian Dollar (CAD) finds support as the Bank of Canada (BoC) held the overnight rate at 2.25% and signaled a data-dependent pause rather than further cuts, keeping short-term policy settings relatively tight.
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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