The USD/CAD pair has broken its three-day winning streak, with the pair trading around 1.4400 during the European hours on Monday. Traders suggest that the USD has lost ground amidst thin trading volumes ahead of the New Year holiday. The US Federal Reserve’s hawkish stance has been a major factor in the currency markets, potentially providing support for the US Dollar and the USD/CAD pair. The Fed’s decision to reduce its benchmark interest rate by 25 basis points at the December meeting, coupled with the latest Dot Plot projections signaling only two rate cuts in 2025, has reinforced cautious sentiment among investors.
Fed Chair Jerome Powell’s remarks earlier this month about approaching rate cuts with caution have also contributed to the USD’s strength. Traders anticipate that President-elect Donald Trump’s administration will implement policies such as tax cuts, tariffs, and deregulation, which are expected to fuel inflation. This, in turn, could prompt the US central bank to adjust its outlook for the upcoming year, further supporting the US Dollar and acting as a tailwind for the USD/CAD pair.
On the other hand, the Canadian Dollar (CAD) has gained ground due to improved crude Oil prices. Canada, being the largest Oil exporter to the United States, benefits when Oil prices rise. The West Texas Intermediate (WTI) Oil price has been on an upward trend, trading at around $70.20 per barrel at the time of writing. However, concerns about an oversupplied Oil market in 2025 and uncertainties surrounding future demand from China, the world’s largest Oil importer, could limit the potential rise in Oil prices and add downward pressure on the Canadian Dollar.
Factors such as interest rates set by the Bank of Canada, Oil prices, the health of the Canadian economy, inflation, and the Trade Balance all play a role in driving the value of the Canadian Dollar. The Bank of Canada’s decisions regarding interest rates significantly impact the CAD. Higher interest rates tend to be positive for the currency, while quantitative easing and tightening can influence credit conditions, with the former being negative for the CAD and the latter being positive. The price of Oil is another crucial factor, as it is Canada’s largest export. A rise in Oil prices generally leads to an increase in the value of the CAD, while a fall in Oil prices has the opposite effect.
Inflation, which traditionally has been seen as a negative factor for a currency, can actually have a positive impact on the CAD in modern times. Higher inflation rates may prompt central banks to raise interest rates, attracting more capital inflows and increasing demand for the Canadian Dollar. Macroeconomic data releases, such as GDP, manufacturing and services PMIs, employment figures, and consumer sentiment surveys, also influence the direction of the CAD. A strong economy is beneficial for the Canadian Dollar, attracting more foreign investment and potentially leading to a hike in interest rates, which strengthens the currency. Conversely, weak economic data can cause the CAD to depreciate.
