The Canadian Dollar continues to face significant pressure, with its value influenced by US Dollar dynamics and ongoing trade tariffs concerns. Since the beginning of February, the currency has been trading in a bearish trend, hitting a low of 1.4150 on February 14. This decline marks a revisit to two-month lows following a drop from yearly peaks around the 1.4800 mark recorded earlier in the month. Despite these setbacks, the Canadian Dollar has shown resilience, regaining some value incrementally over recent weeks and maintaining an area near yearly highs against the US Dollar.
In January, the Bank of Canada reduced its interest rate by 25 basis points, bringing it down to 3.00% as part of its easing measures that commenced in June 2024. The central bank has cut its policy rate by a total of 200 basis points since then. This decision reflects the Bank's cautious approach to monetary policy amid an inflation rate hovering around 2% since August. It projects headline and core CPI inflation to average 2.1% and 2.5% over the first quarter of the year, respectively.
The Canadian Consumer Price Index (CPI) is anticipated to rise by 1.8% year-on-year in January, influenced by various economic factors including a GST/HST holiday from mid-December 2024 to mid-February 2025, which is expected to dampen inflation in certain sectors such as food services and semi-durable goods. Analysts at BBH highlighted the importance of the upcoming CPI data release stating:
“Canada highlight will be January CPI data Tuesday. Headline is expected at 1.9% y/y vs. 1.8% in December, core median is expected to remain steady at 2.4% y/y, and core trim is expected at 2.6% y/y vs. 2.5% in December.” – Analysts at BBH
The Canadian Dollar's performance remains closely linked to the Bank of Canada's interest rate decisions and broader economic conditions. The persistent threat of tariffs has clouded economic forecasts, with Bank members acknowledging the challenge of predicting US trade policy's impact on the national economy.
In light of these complexities, financial analysts are monitoring the currency's movements closely. Pablo Piovano, a senior analyst at FXStreet, remarked on potential bullish trends for USD/CAD:
“Bullish attempts should lead USD/CAD to a potential visit to the interim 55-day SMA at 1.4305, prior to the 2025 high of 1.4792 reached on February 3” – Pablo Piovano, Senior Analyst at FXStreet
January's CPI report, due Tuesday at 13:30 GMT, is expected to significantly influence the Canadian Dollar's trajectory. As the report could provide insights into inflationary pressures and economic health, market participants are watching closely for any indications that could sway monetary policy or currency valuations.
The Canadian Dollar has shed nearly seven cents from its year-to-date highs of approximately 1.4800 earlier this month. This decline underscores ongoing volatility as the currency navigates complex domestic and international economic landscapes.