USD/CAD holds steady above mid-1.4300s; seems vulnerable amid bearish USD

USD/CAD oscillates in a range near the lower end of a short-term trading range.
Rising Oil prices underpin the Loonie and caps spot prices amid a bearish USD.
Rising bets that the Fed will cut rates several times in 2025 weigh on the buck.

The USD/CAD pair kicks off the new week on a subdued note and oscillates in a narrow band above mid-1.4300s, or the lower end of a one-week-old trading range, during the Asian session. Meanwhile, the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside.

Against the backdrop of positive news coming out of the US-Canada trade talk last week, a bullish spike in Crude Oil prices is seen underpinning the commodity-linked Loonie. In fact, the commodity touches a two-week high in reaction to the risk of a further escalation of tensions in the Red Sea, especially after the US vowed to continue strikes against Yemen’s Houthis until their attacks ceased. This, along with the underlying bearish sentiment surrounding the US Dollar (USD), validates the near-term negative outlook for the USD/CAD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near a multi-month low amid worries that US President Donald Trump's tariffs and retaliatory measures from other countries could hurt the US economy. Adding to this, softer-than-expected US inflation and signs of a cooling US labor market might force the Federal Reserve (Fed) to cut interest rates several times this year. This keeps the USD bulls on the defensive and should further contribute to capping any attempted recovery for the USD/CAD pair.

Traders now look forward to the US economic docket – featuring the release of monthly Retail Sales and the Empire State Manufacturing Index – for some impetus later during the North American session. The focus, however, will remain glued to the outcome of the highly-anticipated two-day FOMC policy meeting on Wednesday. This will play a key role in influencing the USD and provide a fresh directional impetus to the USD/CAD pair. In the meantime, bears might wait for weakness below the 1.4350 support before placing fresh bets.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.