Canadian Dollar recovers ground after quick dip to fresh multi-year lows
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Joshua Gibson
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31 Jan @ 06:01 (GMT+0)

Canadian Dollar recovers ground after quick dip to fresh multi-year lows

  • The Canadian Dollar recovered 0.65% against the Greenback on Friday.
  • Little of note from Canada to wrap up the week as US Dollar flows dominate.
  • Market sentiment lurched higher after Trump kicks the tariff can down the road.

The Canadian Dollar (CAD) is recovering ground on Friday, climbing over six-tenths of one percent against the Greenback. The Loonie briefly tumbled to a fresh five-year low against the US Dollar during the overnight session after US President Donald Trump went on a new social media escapade promising a stiff package of tariffs against both Canada and Mexico. A last-minute pivot by the White House that incoming tariffs now may not happen until March has sent market sentiment back into the high side, giving the CAD room to breathe and recover some lost footing.

US Personal Consumption Expenditures Price Index (PCEPI) inflation figures came in exactly as expected on Friday. Canadian Gross Domestic Product (GDP) growth missed the mark, showing a steeper-than-expected contraction in November, but the back-dated data print had little measurable impact on Loonie flows.

Daily digest market movers: Canadian Dollar rebounds on broad Greenback weakness

  • The Canadian Dollar has knocked back into its ongoing consolidation range after testing fresh multi-year lows, gaining 0.65% on Friday. The USD/CAD pair briefly tested 1.4600 before slumping back below 1.4400 once again.
  • President Donald Trump’s latest iteration of his own tariff package threats now suggests that tariffs won’t begin until March 1, kicking the can down the road on tariffs that markets initially expected to begin this weekend.
  • The last-minute pivot on President Trump’s tariffs threats are being scooped up by markets, sending sentiment higher. Some market insiders, such as analysts at JPMorgan, now expect tariffs not to happen at all unless something significantly changes.
  • US PCEPI inflation clocked in exactly as expected on Friday, with December’s MoM figure ticking up to 0.2% from 0.1%, and the annualized figure holding steady at 2.8%. 
  • Canadian November GDP printed below expectations at -0.2%, falling below the -0.1% forecast and tumbling back from the previous month’s 0.3%.

Canadian Dollar price forecast

The Canadian Dollar’s back-and-forth action against the Greenback has increased volatility in USD/CAD charts, but momentum is still limited as underlying drivers remain unchanged. USD/CAD rose to within touch range of the 1.4600 handle late Thursday, before easing back and backsliding into congestion near the 1.4400 handle. The pair is now poised to resume chugging along in familiar consolidation territory, and Loonie bulls are running out of time to spark a fresh bid behind the Canadian Dollar and push USD/CAD back down below the 50-day Exponential Moving Average (EMA) at 1.4280.

USD/CAD daily chart

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.