- USD/CAD marked 1.4290 on Tuesday, a level last seen in April 2020.
- The US Dollar retraces its two days of losses amid higher Treasury yields.
- The CAD faces headwinds amid political uncertainty, as Prime Minister Justin Trudeau encounters growing calls to resign.
USD/CAD continues its winning streak for the fourth consecutive day, trading around its fresh multi-year high at 1.4290 during the European hours on Tuesday. The pair gains support as the US Dollar (USD) retraces its losses from the previous two sessions, which could be attributed to the higher Treasury yields.
The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades near 107.00 with 2- and 10-year yields on US Treasury bonds standing at 4.26% ad 4.41%, respectively, at the time of writing.
Traders are bracing a potential interest rate cut by the US Federal Reserve (Fed) on Wednesday, with attention largely focused on the Fed’s projections for 2025. According to the CME FedWatch tool, markets are now almost fully pricing in a quarter basis point cut at the Fed’s December meeting.
The Canadian Dollar (CAD) faces challenges due to dovish remarks from the Bank of Canada (BoC) Governor Tiff Macklem. On Monday, Macklem stated that the BoC is preparing for a future marked by greater uncertainty and increased vulnerability to shocks. He added that the central bank will assess the need for further reductions in the policy rate one decision at a time and expects a more gradual approach to monetary policy if the economy evolves as expected.
Additionally, political challenges in Canada could weigh on the CAD. Prime Minister Justin Trudeau is facing mounting calls to resign following Finance Minister Chrystia Freeland’s announcement on Monday that she is stepping down from the Cabinet, according to CNN.
Traders will likely observe the Canadian November Consumer Price Index (CPI) inflation data is due later on Tuesday. Meanwhile, November’s US retail sales data is expected to be released in the North American session.
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.
