- USD/CAD consolidates around 1.4400 amid thin trading volume in a holiday-curtailed week.
- Fed policymakers see more than one interest rate cut in 2025.
- The BoC has guided a gradual policy-easing approach for the next year.
The USD/CAD pair trades sideways around 1.4400 in Tuesday’s North American session. The Loonie pair consolidates as it follows the footprints of the US Dollar (USD), which is grappled with volatility contraction in a thin volume trading day due to the holiday-shortened week.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades lackluster above 108.00.
The outlook of the Greenback remains firm as the Federal Reserve (Fed) indicated that it would follow a more measured approach to further policy-easing. In the latest Fed’s dot plot, policymakers collectively forecasted a target for the federal fund rate at 3.9% by the end of 2025, suggesting more than one interest rate cut from their current levels.
According to the CME FedWatch tool, traders fully anticipate that the Fed will leave interest rates unchanged in January at 4.25%- 4.50%.
Meanwhile, the Canadian Dollar (CAD) remains weak across the board amid the wide policy divergence of the Bank of Canada (BoC) compared to other central banks. The BoC has already reduced its key borrowing rates by 175 basis points (bps) this year. However, it has guided a gradual policy easing approach, as officials advise patience to see the full effects of past cuts.
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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