USD/CAD languishes near YTD low, seems vulnerable below 1.3800 mark
- USD/CAD struggles to lure buyers, though a combination of factors helps limit the downside.
- Bearish Crude Oil prices undermine the Loonie and support spot prices amid a modest USD uptick.
- Bets for aggressive Fed rate cuts should cap the USD and cap any recovery for the currency pair.
The USD/CAD pair enters a bearish consolidation phase during the Asian session on Thursday and oscillates in a narrow band below the 1.3800 mark, near its lowest level since October 2025 touched the previous day.
The Canadian Dollar (CAD) continues to be underpinned by the Liberal Party's victory in the Canadian federal election, which strengthens the incumbent Prime Minister Mark Carney’s position in trade negotiations with the US. However, the recent slump in Crude Oil prices to a nearly three-week low offset the supporting factors and keeps a lid on any meaningful upside for the commodity-linked Loonie. This, along with a modest US Dollar (USD) uptick, acts as a tailwind for the USD/CAD pair.
According to the advance estimates, the US economy unexpectedly contracted during the first quarter of 2025. This comes on top of persistent worries about US President Donald Trump's erratic trade policies and adds to concerns about a looming global recession, which is expected to dent fuel demand. This, along with expectations that several OPEC+ members will suggest an acceleration of output hikes for a second consecutive month in June, act as a headwind for the black liquid.
Meanwhile, the dismal US GDP print, along with signs of easing inflationary pressures, reaffirms market bets for the resumption of the Federal Reserve's (Fed) rate-cutting cycle in June. Moreover, traders are currently pricing in the possibility that the US central bank will lower borrowing costs by a full percentage point by the year-end. This might hold back the USD bulls from placing aggressive bets and suggests that the path of least resistance for the USD/CAD pair remains to the downside.
The negative outlook is reinforced by the overnight breakdown through the lower boundary of a short-term trading range held over the past week or so. Moreover, oscillators on the daily chart are holding deep in negative territory and favor bearish traders. Hence, any attempted USD/CAD move-up is more likely to get sold into. Traders now look to the key US macro data scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI on Thursday, for a fresh impetus.
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.