Canadian Dollar treads familiar waters heading into the year’s end
- The Canadian Dollar remains trapped near familiar levels as 2025 winds down.
- The Loonie is holding steady following a string of gains against the US Dollar.
- Market volumes will remain restrained as the calendar year draws to a close.
The Canadian Dollar (CAD) struggled to find meaningful momentum in either direction against the US Dollar (USD) on Monday, kicking off the last trading week of 2025 on a directionless note. Despite a lack of year-end trading volumes, the Loonie is holding strong against the Greenback following a string of one-sided sessions through the back half of 2025’s fourth quarter.
Central bank interest rate differentials remain in the driver’s seat for the Canadian Dollar, with the Bank of Canada (BoC) stuck with little room to move rates any lower after a furious pace of interest rate cuts through 2024 and 2025, trimming rates a total of nine times, with back-to-back jumbo double cuts in October and November of 2024. The Federal Reserve (Fed), by comparison, is widely expected to get bullied into a faster pace of interest rate cuts over the next two years, putting a hard cap on interest rate differentials and drawing a firm line above the Greenback.
Daily digest market movers: Year-end holiday markets remain sluggish as volumes dry up
- The Canadian Dollar is holding within one-tenth of one percent against the US Dollar on Monday.
- Despite pinning deep into oversold territory, the USD/CAD pair remains trapped deep in bear country, stuck below 1.3700.
- Despite a brief plunge to 22-year lows early in 2025, the Loonie has been on a steady, one-sided grind higher against the Greenback, gaining nearly 5% year-to-date.
- The Fed’s latest Meeting Minutes, due on Tuesday, will give markets one last peek into Fed internal discussions on interest rates before the end of the year.
- Rate markets are pricing in at least two interest rate cuts from the Fed through 2026, capping bullish potential for the US Dollar and putting USD/CAD on a collision course with multi-year lows.
Canadian Dollar price forecast
A deeply oversold USD/CAD pair is primed for a near-term bullish turnaround, but macro factors are weighing on bulls, capping upside potential. The pair is trading on the bearish side of the 50-day and 200-day Exponential Moving Averages (EMA), which have completed a bearish cross.
1.3800-1.3900 remains the high end of a bullish return to the median, while long-term prospects remain a clear-cut short side extension, with a breakdown to the 1.3500 neighborhood on the cards.
USD/CAD daily chart
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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