Market Data 
- USD/CAD struggles to gain any meaningful traction on Monday amid mixed cues.
- Fed rate cut bets prompt some USD selling and act as a headwind for the major.
- Softer Oil prices and Canadian politics undermine the Loonie and lend support.
The USD/CAD pair kicks off the new week on a softer note amid the emergence of some selling around the US Dollar (USD), though it lacks bearish conviction and has now reversed an Asian session dip to the 1.4325 region. Spot prices, however, remain confined in Friday’s broader range and currently trade just below mid-1.4300s, nearly unchanged for the day.
Even though the Federal Reserve (Fed) gave a bump higher to its inflation projection, investors seem convinced that a tariff-driven US economic slowdown might force the central bank to resume its rate-cutting cycle soon. This, along with a positive risk, fails to assist the safe-haven USD to build on a three-day-old recovery move from a multi-month low and turns out to be a key factor acting as a headwind for the USD/CAD pair.
Meanwhile, Crude Oil prices attract some sellers and move away from a three-week high touched on Friday as traders brace for US President Donald Trump’s so-called reciprocal tariffs on April 2. Adding to this hopes for a positive outcome from Russia-Ukraine peace talks further weigh on the black liquid, which, in turn, undermines the commodity-linked Loonie and helps limit any meaningful downside for the USD/CAD pair.
Furthermore, Canada’s new Prime Minister, Mark Carney, has called for a snap election in the country on April 28. This further holds back traders from placing aggressive bullish bets around the Canadian Dollar (CAD), which suggests that the path of least resistance for the USD/CAD pair is to the upside. That said, last week’s failure near the 1.4400 mark makes it prudent to wait for strong follow-through buying before placing fresh bullish bets.
Moving ahead, traders now look forward to the release of flash US PMI prints later during the North American session. Apart from this, speeches by influential FOMC members and the broader risk sentiment will drive the USD demand. This, along with Oil price dynamics, should produce short-term opportunities around the USD/CAD pair. Nevertheless, the fundamental backdrop warrants caution before placing fresh directional bets.
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.
