The Canadian Dollar (CAD) remains under significant pressure as a myriad of factors influence its current and future value. Key drivers include the Bank of Canada's (BoC) interest rate decisions, oil prices, the health of the Canadian economy, inflation rates, and trade balance dynamics. The recent imposition of a 25% tariff on steel and aluminum by the United States further complicates the economic landscape, posing severe challenges to Canada, the largest exporter of aluminum to the US.
The BoC plays a pivotal role in steering the CAD's direction through its monetary policy. By adjusting interest rates, the BoC can influence lending conditions, with quantitative easing generally being CAD-negative and tightening being CAD-positive. The main aim of the BoC is to maintain inflation within the 1-3% target range. As such, its decisions are crucial in determining the strength of the Canadian Dollar.
Oil prices significantly impact the CAD due to Canada's status as a major oil exporter. Higher oil prices often lead to a positive trade balance, which supports a stronger CAD. Conversely, any downturn in oil prices could weaken the currency. The health of the Canadian economy also plays a role; strong macroeconomic indicators such as GDP growth, manufacturing and services PMIs, employment figures, and consumer sentiment surveys tend to bolster the CAD.
The introduction of tariffs by US President Trump presents a formidable challenge for Canada’s economy. As the largest aluminum exporter to the US, these tariffs could severely impact Canada's trade balance and economic health, potentially weakening the CAD. A robust economy typically strengthens a currency, but these trade tensions may hinder economic performance.
On the technical front, the USD/CAD pair is currently trading within Monday's range around 1.4330 during Tuesday’s European session. The Relative Strength Index (RSI) oscillates between 40.00 and 60.00, indicating a sideways trend. Meanwhile, the 50-period Exponential Moving Average (EMA) near 1.4365 serves as a significant resistance level for US Dollar bulls.
The Federal Reserve's recent decision to leave interest rates unchanged in January adds another layer of complexity to the USD/CAD dynamic. The strategists at Macquarie have revised their forecasts for US interest rates.
"Our updated view is for no change in the fed funds rate during 2025 with it likely to remain in the 4.25 to 4.5% range. Previously we had suggested there would be just one further 25 bps cut in either March or May." – Strategists at Macquarie
This steady rate expectation could influence market perceptions and trading behaviors involving the USD/CAD pair.