- The Canadian dollar was trading nearly 1.5% higher at its peak on Monday.
- The Bank of Canada’s latest forecasts don’t reveal anything particularly noteworthy.
- The Canadian dollar is benefiting from broad market easing in the US dollar.
The Canadian dollar (CAD) got a rare boost on Monday, sending the USD/CAD pair below 1.4400 as investors around the world found some appetite for risk after new US President Donald Trump made a last-minute U-turn to avoid tariffs. On day one through executive order. .
The Bank of Canada’s (BoC) latest business outlook survey revealed some surprises, with overall economic sentiment remaining weak. However, the Bank of Canada noted that the overall depth of bearish sentiment appears shallow, with slightly fewer businesses and consumers anticipating a recession next year.
Daily summary of market drivers: The Canadian dollar got a buy bid as the dollar fell on upbeat market sentiment
- The Canadian dollar rebounded after hitting a new 5-year low against the US dollar.
- Markets opened the spigots following the announcement that new US President Donald Trump will not impose sweeping first-day tariffs of at least 20% on all major US trading partners at the same time.
- According to the Bank of Canada, only 46.5% of consumers in the fourth quarter expect a recession in the next 12 months, down from 49% in the third quarter. 15% of Canadian businesses also expect a recession next year, down slightly from 16%.
- Despite the general decline in recession fears, Canada’s employment outlook remains weak, and most businesses expect someone else to foot the costs of expected increases in consumer spending.
- Canadian businesses remain uncertain about the future of the economy in the face of the incoming Trump administration, which has a track record of outlandish economic claims and equally bizarre trade policies.
Canadian dollar price forecast
The Canadian Dollar (CAD) found a much-needed supply on Monday, even if it was entirely teased by outside sources. Market flows reversed direction out of the US dollar to start the new trading week, sending the USD/CAD pair below the 1.4400 level and price action falling towards the 50-day Exponential Moving Average (EMA) near 1.4230.
The pair has been trading in an approximate range between 1.4400 and 1.4300 since rising to a multi-year high in December. Canadian dollar traders are looking for reasons to buy after a one-sided long stretch that saw the Canadian dollar fall nearly 8% from top to bottom over a four-month period. However, technical oscillators are starting to pull back from overbought territory, and a noticeable lack of progress in building the Canadian dollar back against the US dollar could see the USD/CAD pair rise to new highs.
Daily chart of the USD/CAD pair
Frequently asked questions about the Canadian dollar
The main factors that move 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 main factor that drives the Canadian Dollar (CAD). The difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive.
The price of oil is a major factor affecting the value of the Canadian dollar. Oil is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment and consumer surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.
