• USD/CAD could appreciate further due to the hawkish policy shift by the US Federal Reserve.

• The latest FOMC Meeting Minutes showed that Fed policymakers expressed concern about inflation and the impact of President-elect Trump’s policies.

• The commodity-linked CAD struggles due to lower crude Oil prices.
   

  

USD/CAD edges lower after registering gains in the previous two sessions, trading around 1.4370 during the Asian hours on Thursday. However, faced challenges as the US Dollar (USD) appreciated due to increased hawkish sentiment surrounding the Federal Reserve’s (Fed) policy in 2025.

The Federal Open Market Committee (FOMC) Minutes for the December policy meeting showed that Federal Reserve’s (Fed) policymakers expressed concern about inflation and the impact that President-elect Donald Trump’s policies could have.

officials indicated they would be moving more slowly on rate reductions because of the uncertainty. Fed officials penciled the expected cuts in 2025 to two from four in the previous estimate at September’s meeting.

The US (DXY), which measures the US Dollar’s (USD) performance against six major currencies, holds its position near 109.00 as long-term US bond yields continue climbing on heavy supply. The 10-year stand at 4.66%, while the 30-year approached 4.90% at the time of writing.

Traders are evaluating the implications of Canadian Prime Minister (PM) Justin Trudeau's resignation after nine years in office, amid escalating tariff threats, political instability, and declining approval ratings, which could pave the way for snap elections. Trudeau announced on Monday that he would step down as the leader of Canada’s ruling Liberal Party once a successor is chosen.

Additionally, the commodity-linked CAD faces challenges against the US Dollar due to weakening prices, given that Canada is the largest Oil exporter to the (US). West Texas Intermediate (WTI) Oil price extends its losses for the second successive day, trading around $72.70 per barrel at the time of writing.

Traders analyze the latest weekly report from the US Energy Information Administration (EIA). The EIA report indicated a 0.959 million-barrel drop in US crude Oil stockpiles, marking the seventh consecutive decrease. The market expectations were a 0.250 million-barrel decline for the week ending January 3, against the previous decline of 1.178 million barrels.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?
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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?
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.

How does inflation data impact the value of the Canadian Dollar?
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.

How does economic data influence the value of 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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