The Canadian Dollar (CAD) hit a bit of a bump and run against the US Dollar (USD) on Monday, clawing back further ground in a much-needed technical bounce-back from 30-week lows. Loonie traders are awaiting further developments on both trade between Canada and the US, as well as a clearer picture of how likely both the Bank of Canada (BoC) and the Federal Reserve (Fed) will keep cutting interest rates into the end of the year.
Canadian Prime Minister Mark Carney has noted several times over the past several weeks that trade talks between his office and US President Donald Trump’s administration have not resumed since Donald Trump abruptly pulled out of all discussions recently. Trump remains irate over commercials that aired, quoting former President Ronald Reagan, criticizing trade tariffs, a favored method of Donald Trump’s for achieving a pyrrhic trade war victory at a cost to US taxpayers. With trade talks still on ice, it remains difficult for the Trump administration to provide evidence of a resounding, bully-style trade war victory against Canada as key members of Trump’s team frequently claim is in the works.
Daily digest market movers: Canadian Dollar extends recovery as central bank expectations weigh on USD/CAD rate
- The Canadian Dollar is slowly clawing back ground after hitting six-month lows against the US Dollar last week.
- Bullish Loonie momentum may find a floor now that rate markets expect the Bank of Canada to hold steady on interest rates through the end of 2026 at minimum, but that chould change if economic conditions deteriorate further.
- The official Canadian inflation rate rotated higher at the last print, rising to 2.4% YoY and tipping back above the BoC’s upper band target of 2.0%.
- Financial markets are broadly awaiting signals that the Fed will deliver a third interest rate cut before the end of the year before fully parsing their bets.
- At the current cut, rate traders are pricing in full odds that a January rate cut will be forthcoming if the Fed stands pat in December.
Canadian Dollar price forecast
USD/CAD continues to trade within an upward trend, though recent price action suggests a short-term pullback is underway as the Canadian Dollar recovers lost ground. After reaching a recent high near 1.4140, buyers failed to extend the advance, leading to a two-day retracement that now tests the 1.4010–1.4000 area.
The 50-day exponential moving average (EMA) near 1.3950 and the 200-day EMA near 1.3900 remain positively aligned, reflecting broader bullish momentum. However, the inability to hold above 1.4100 signals waning near-term buying pressure. A daily close below 1.4000 could open room for a move toward 1.3950, while renewed strength above 1.4140 would reassert upside control and target 1.4200.
The relative strength index (RSI) at 52 indicates neutral momentum following earlier overbought readings, consistent with a consolidation phase within an overall bullish bias.
USD/CAD daily chart
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.