**Canadian Dollar Weakens Further as the US Dollar Strengthens: Insights from Scotiabank and Market Trends**
(Original Reporting by FXStreet Staff, with additional research and elaboration)
The Canadian Dollar (CAD) continued to lose ground against the US Dollar (USD) as we entered the second week of January 2024. The persistent uptrend in the greenback and global risk-off sentiment following mixed economic indicators have put pressure on commodity-linked currencies like the CAD.
According to analysts from Scotiabank, the recent behavior of the CAD largely reflects broad-based USD strength rather than any domestic weakness in Canadian economic fundamentals. The Forex market has been markedly responsive to macroeconomic developments, especially from the US, reinforcing the idea that global monetary policy expectations, interest rate differentials, and general sentiment are the dominant market drivers now.
This article delves into recent performance in the USD/CAD pair, analyzes the major contributing factors to the Canadian currency’s weakness, and offers insights into what traders should watch in the short to medium term. All market observations are current as of early January 2024.
## Summary of USD/CAD Performance
– The Canadian Dollar has depreciated steadily against the US Dollar in January 2024.
– The USD/CAD exchange rate continued to climb, breaching 1.34 levels, reaching around 1.3440 during intraday trading sessions.
– Scotiabank strategists noted further downside risk for the CAD if USD strength continues to dominate currency markets.
– Canadian economic data remains relatively neutral and has not created significant downward pressure on CAD independently.
## Key Drivers Behind Canadian Dollar Weakness
### 1. US Dollar Strength and Global Risk Aversion
Contrary to expectations of a softening USD due to an assumed dovish pivot from the Federal Reserve, the US currency has remained resilient during the first weeks of 2024.
– A broad-based USD rebound has been driven by market participants dialing back their expectations for early rate cuts from the Federal Reserve.
– Mixed US economic data — including firmer-than-expected job market indicators — has supported the narrative of prolonged higher interest rates.
– According to the US Bureau of Labor Statistics (BLS), December’s Nonfarm Payrolls exceeded expectations, coming in at 216,000 jobs added versus expectations of 170,000.
– The unemployment rate remained steady at 3.7%, reinforcing the Fed’s data-dependent stance on rates.
– Consumer sentiment and inflation data have also contributed to a more cautious market outlook regarding Fed rate pivots, reducing risk appetite and boosting demand for safe-haven flows into the USD.
### 2. Commodity Prices and Canada’s Resource-Driven Economy
Since Canada is a major exporter of crude oil and other natural resources, fluctuations in commodity prices have a direct impact on the currency.
– West Texas Intermediate (WTI) crude oil prices experienced notable volatility, mostly trending sideways with downward bias due to global demand fears.
– Brent Crude, which typically guides international oil benchmarks, fell below $77 per barrel in early January, reflecting weak demand projections from Asia and Europe.
– The weakening oil prices have dragged on the CAD due to Canada’s reliance on energy exports, even as supply-side concerns in the Middle East provide limited support to prices.
– Canadian oil exports are denominated in US Dollars, so declining export revenues can lead to softening CAD valuations, especially when paired with lower risk appetite.
### 3. Bank of Canada’s Policy Stance
The Bank of Canada (BoC) has also influenced recent CAD trends, although less directly, as markets have remained more reactive to Federal Reserve signals.
– BoC has – so far – indicated that it will remain patient and monitor inflation pressures before making decisions on rate changes.
– While inflation in Canada has come down from its peak, core inflation components remain sticky.
– The BoC has maintained its Overnight Rate at 5.00% since July 2023 and is expected to hold it steady
Read more on USD/CAD trading.