USD/CAD continues to trade below the multi-year high of 1.4245, which was reached on Friday. During Monday’s Asian session, the pair hovered around 1.4230, reflecting subdued US Dollar (USD) strength amid tepid US Treasury yields ahead of the Federal Reserve’s (Fed) upcoming interest rate decision. Market expectations now suggest a nearly full probability of a 25 basis point rate cut at the Fed’s final policy meeting of 2024.
Market Dynamics
The Canadian Dollar (CAD) has faced downward pressure following the Bank of Canada’s (BoC) aggressive easing of monetary policy. Last week, the BoC cut its key interest rate by 50 basis points to 3.25%, as expected, signaling a more cautious and gradual approach to easing, particularly as borrowing costs have declined significantly. BoC Governor Tiff Macklem highlighted that US President-elect Donald Trump’s trade policies and tariffs could weigh on Canada’s exports and economic prospects.
Meanwhile, crude oil prices could support the Canadian Dollar. Rising geopolitical tensions, including additional US sanctions on major oil producers like Russia and Iran, have raised the likelihood of tighter oil supplies. West Texas Intermediate (WTI) oil is trading around $70.50 per barrel, adding upward pressure on the CAD.
Fed and US Treasury Yields
Ahead of Wednesday’s Fed meeting, the subdued USD reflects expectations for a rate cut as the US economy shows signs of slowing inflation but remains resilient. According to the CME FedWatch tool, markets are almost fully pricing in a 25 basis point cut from the Fed, with some anticipating a potential pause in rate hikes after this meeting.
ING analysts expect USD/JPY to trend towards the 155 level, driven by both recent Fed commentary and rising US Treasury yields, which have put downward pressure on the USD.
Canadian Dollar Drivers
- Interest Rates: The BoC’s rate decisions play a key role in shaping the CAD, with higher interest rates generally supportive of the currency.
- Oil Prices: As Canada’s largest export, fluctuations in oil prices directly impact the CAD. Higher oil prices typically boost the CAD due to increased demand for Canadian exports.
- Economic Data: Strong economic data tends to strengthen the CAD, as it could prompt the BoC to raise interest rates. Conversely, weak economic data tends to weaken the CAD.
- Geopolitical Risks: Tensions related to trade and geopolitical events also influence the CAD, particularly in relation to trade with the US.
Overall, USD/CAD remains under pressure as the market anticipates further easing from both the BoC and Fed, with crude oil price movements playing a crucial role in shaping the Canadian Dollar’s outlook.