Title: USD/CAD Weekly Forecast: Trade Uncertainty Pressures Loonie Amid Rising U.S. Rate Outlook
Adapted and expanded from an article by Kenny Fisher, originally published on Forex Crunch
Overview
The USD/CAD currency pair saw notable volatility in the past week, primarily driven by geopolitical trade tensions and differing economic signals from the United States and Canada. Market sentiment around the Canadian dollar (CAD) has been undermined by concerns about trade barriers, while the U.S. dollar (USD) continues to draw strength from a resilient U.S. economy and expectations of further interest rate hikes from the Federal Reserve.
As the market weighs global risk conditions, domestic economic indicators, and central bank policy outlooks, the USD/CAD exchange rate remains subject to directional shifts. Last week’s developments indicate that the loonie may be in for further declines unless broader macroeconomic fundamentals shift significantly.
Recap of Last Week: Key Drivers for USD/CAD
The USD/CAD pair climbed steadily throughout the week, rising from a weekly open near 1.3430 to close around 1.3530. The U.S. dollar was buoyed by another round of strong economic data and hawkish commentary from Federal Reserve officials, while the Canadian dollar struggled to maintain momentum amid domestic softness and trade concerns.
Highlights of the Week:
– Strong U.S. economic indicators, including upbeat manufacturing and retail sales data, improved labor market performance, and resilient consumer confidence
– The Bank of Canada (BoC) signaled hesitation about further rate hikes even as inflation remains sticky, hinting at a cautious approach toward monetary tightening
– Renewed trade concerns, especially around tariffs affecting Canadian exports to the U.S. and China, weighed heavily on investor sentiment toward the loonie
Trade Barriers and the Canadian Dollar
Trade friction has once again emerged as a key narrative undermining the Canadian dollar. For Canada, a trading nation heavily reliant on exports—especially in the energy and commodities sectors—any hit to global trade flows poses a significant risk to its economy and currency valuation.
Key trade-related challenges include:
– U.S. Trade Policy: The U.S. has imposed or threatened new tariffs on several imported goods, which could include Canadian aluminum and steel exports. While the actual impact remains limited for now, the uncertainty and risk of escalation have sparked investor caution.
– China Slowdown and Commodity Demand: China’s economic recovery has been weaker than expected in 2024, affecting global commodity demand. Since much of Canada’s export revenue stems from resources like oil, timber, and metals, this hurts the earnings potential of Canadian sectors.
– Disrupted North American Supply Chains: Delays and regulatory disputes in the U.S.-Mexico-Canada Agreement (USMCA) implementation may also limit the potential of North American integration to support Canadian growth.
As protectionist measures around the world intensify, risk-off market sentiment tends to favor safe-haven currencies like the U.S. dollar, at the expense of risk-sensitive commodity currencies like the Canadian dollar.
Monetary Policy Divergence: Fed vs. BoC
One of the most impactful forces moving the USD/CAD pair is the widening divergence between the Federal Reserve and the Bank of Canada in terms of their monetary policies.
Federal Reserve (U.S.):
– The Fed has maintained a hawkish tone in recent months, arguing that inflation remains a persistent concern
– While rate hikes paused earlier this year, market participants are expecting one or two more 25 basis point hikes before year-end if inflation proves sticky
– Strong labor market gains and steady consumer spending give the Fed room to tighten further
Bank of Canada (Canada):
– The BoC has also hiked rates during this cycle, but Governor Tiff Macklem and other officials have begun adopting a more cautious stance
– Canadian inflation appears more volatile but has shown recent signs of cooling more rapidly than in the U.S.
– Consumer debt levels
Read more on USD/CAD trading.