The USD/CAD currency pair has attracted some buyers at the start of the new week. However, it struggles to maintain momentum and lacks a consistent follow-through, remaining below the 1.4200 mark. This development comes as the Canadian Dollar faces multiple influences, including fluctuating oil prices and economic policies from both the Bank of Canada (BoC) and the Federal Reserve (Fed). Meanwhile, crude oil prices have dropped to nearly a two-month low, fueled by hopes for a peace deal between Russia and Ukraine, which in turn affects Canada's largest export.
Oil prices play a pivotal role in determining the value of the Canadian Dollar, given that petroleum is Canada's biggest export. The recent drop in oil prices has added pressure on the CAD, with the commodity's price decline having an immediate impact on its value. The Canadian economy's health, inflation rates, and trade balance are other vital factors influencing the CAD's valuation. The BoC aims to maintain inflation within a 1-3% range, using interest rate adjustments to achieve this target.
The USD/CAD pair started the new week on a positive note, reversing a significant portion of Friday's decline to the mid-1.4100s. This modest recovery occurs amidst a broader context where the US Dollar's recent decline has helped cap potential upside for the pair. Despite this, the growing acceptance that the Federal Reserve will maintain its hawkish stance due to persistent inflation has provided some support for the USD/CAD pair.
In 2024, Mexico, China, and Canada accounted for 42% of total US imports, underlining the interconnectedness of these economies. The health of the US economy remains a critical factor affecting the Canadian Dollar, as the United States is Canada's largest trading partner. Moreover, the Bank of Canada influences the CAD through its monetary policy actions, including adjusting interest rates and employing quantitative easing or tightening strategies.
The Bank of Canada's primary objective is to keep inflation within its target range. To achieve this, it can adjust interest rates—raising them to cool down inflation or lowering them to stimulate economic growth. Additionally, quantitative easing can be used to increase liquidity in the market, although this approach tends to be CAD-negative. Conversely, quantitative tightening can strengthen the CAD by reducing liquidity.
The Canadian Dollar also faces challenges from global economic dynamics. For instance, speculation surrounding a potential rate cut by the Reserve Bank of Australia has dragged the Australian Dollar lower against the US Dollar. This environment of shifting economic policies and currency valuations adds another layer of complexity to the Canadian Dollar's performance.
Concurrently, the USD Index (DXY), which measures the Greenback against a basket of currencies, experienced significant losses last week. This decline was partly due to easing concerns over potential economic repercussions from former US President Donald Trump's trade tariffs. The interplay between these global economic forces underscores the volatility experienced by currency pairs such as USD/CAD.