- USD/CAD depreciates following reports that Canadian PM Justin Trudeau is set to resign on Monday.
- WTI Oil price hovers near its highest level since October, driven by the potential increase in global fuel demand.
- The US Dollar Index holds its position near 109.00, close to recent highs.
USD/CAD halts its four-day winning streak, trading around 1.4400 during the Asian session on Monday. This downside of the pair could be attributed to the improved Canadian Dollar (CAD) following reports that Canadian Prime Minister Justin Trudeau is set to resign on Monday. Additionally, higher Oil prices provide support for the commodity-linked CAD, given that Canada is the largest crude exporter to the United States (US).
In politics, Canadian PM Justin Trudeau is expected to announce his resignation before a national caucus meeting on Wednesday. Citing three sources, The Globe and Mail reported on Sunday that Trudeau is likely to announce as early as Monday that he will step down as Liberal Party Leader.
West Texas Intermediate (WTI) Oil trades around $73.50 per barrel, nearing its highest level since October 2024. Investors are closely monitoring the potential impact of colder weather in the Northern Hemisphere and Beijing’s economic stimulus measures on global fuel demand.
However, the downside of the USD/CAD pair could be limited as the US Dollar (USD) gains ground amid the Federal Reserve’s (Fed) hawkish policy shift. The US Dollar Index (DXY), which measures the US Dollar’s (USD) performance against six major currencies, holds its position near 109.00, close to recent highs.
After three consecutive rate cuts, the Fed is expected to halt its easing cycle at the January meeting. According to the latest dot plot in the Fed’s Summary of Economic Projections, policymakers anticipate the Federal Funds Rate reaching 3.9% by the end of the year, indicating expectations for just two rate cuts in 2025.
Fed officials have also signaled a more cautious approach to rate reductions in 2025. On Friday, Richmond Fed President Thomas Barkin highlighted that the benchmark policy rate should remain restrictive until there is greater confidence that inflation is on track to return to the 2% target.
Additionally, Fed Governor Adriana Kugler and San Francisco Fed President Mary Daly underscored the challenging balancing act facing US central bankers as they aim to slow the pace of monetary easing this year.
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.
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