Canadian Dollar edges higher but remains close to April 2025 lows vs bullish USD
- USD/CAD attracts some sellers during the Asian session, though the downside seems limited.
- A hawkish Fed, elevated US bond yields, and Middle East jitters continue to underpin the USD.
- Traders look to the US inflation data and Fed Chair Kevin Warsh’s speech for a fresh impetus.
The USD/CAD pair edges lower during the Asian session on Tuesday, though it remains close to the highest level since April 2025, touched last week. Spot prices currently trade around the 1.4270 region as a bullish US Dollar (USD) helps limit the downside.
In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, stands firm near an 18-month top amid the US Federal Reserve's (Fed) hawkish stance and escalating Middle East conflicts. The September FOMC meeting Minutes showed last Wednesday that policymakers still view inflation as the dominant threat to macroeconomic stability and back the case for further policy tightening.
Adding to this, inflation risks stemming from volatile energy prices reinforce market expectations that the US central bank will raise borrowing costs by the year-end and remain supportive of elevated US bond yields. Adding to this, a sharp escalation of fighting between the Iran-aligned Houthis in Yemen and the Saudi-led coalition keeps the geopolitical risk premium in play, further benefiting the safe-haven buck.
The Canadian Dollar (CAD), on the other hand, continues with its relative underperformance due to the Bank of Canada's predominantly dovish policy stance, a sluggish domestic economy and US-Canada trade tensions. That said, the recent recovery in crude oil prices offers some support to the commodity-linked Loonie, which, in turn, is holding back traders from placing fresh bullish bets around the USD/CAD pair.
Investors might also opt to wait for the release of the latest US inflation figures – Consumer Price Index (CPI) and Producer Price Index (PPI) on Wednesday and Thursday, respectively. Apart from this, Fed Chair Kevin Warsh's speech at the annual meetings of the IMF and World Bank in Bangkok on Friday would drive the USD and provide a fresh impetus to the USD/CAD pair amid a bearish fundamental backdrop.
USD/CAD 4-hour chart
Technical Analysis
The USD/CAD pair remains confined in a range held since the start of this month, highlighting a bullish consolidative phase after the recent strong rally from the September monthly low. Meanwhile, a move beyond the $1.4300 mark is needed to back the case for an extension of a well-established short-term uptrend.
On the flip side, any corrective pullback could attract fresh buyers near the overnight swing low, at 1.4240, which is followed by the lower boundary of the range, around 1.4200. A convincing break below the latter might prompt some technical selling and pave the way for some meaningful corrective decline.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.