USD/CAD gathers strength to near 1.3700 as Fed holds rate steady
- USD/CAD strengthens to around 1.3695 in Thursday’s early Asian session.
- Fed officials voted to hold the benchmark federal funds rate steady at its June meeting on Wednesday.
- Trump will discuss his advisers on the Israel-Iran conflict but is undecided on a US strike.
The USD/CAD pair trades in positive territory for the third consecutive day near 1.3695 during the early Asian session on Thursday. The US dollar (USD) edges higher against the Canadian Dollar (CAD) after the Federal Reserve (Fed) kept interest rates unchanged at the June policy meeting. Investors will closely monitor the Middle East conflict as tensions continue.
The Federal Open Market Committee (FOMC) voted unanimously on Wednesday to leave the interest rate unchanged in a range of 4.25%-4.50%. Fed officials continued to pencil in two interest-rate reductions in 2025, though new projections showed a growing divide among policymakers.
Fed officials expect US President Donald Trump’s tariff policies could weigh on economic activity and put upward pressure on prices. Policymakers raised their median estimate for inflation at the end of 2025 to 3.0% from 2.7%, while revising their forecast for economic growth in 2025 to 1.4% from 1.7%. Fed officials forecast an Unemployment Rate of 4.5% by the end of the year, up slightly from their previous estimate.
Investors remain focused on the conflicts between Israel and Iran, which boost the safe-haven flows, supporting the Greenback. Trump said on Wednesday that he would hold another meeting Wednesday to discuss the conflict in the Middle East, but he had not made a final decision on whether the US plans to join Israel’s offensive aimed at destroying Iran’s nuclear enrichment program.
Meanwhile, a rise in Crude Oil prices might lift the commodity-linked Loonie and cap the upside for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
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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