**The Canadian Dollar Continues to Struggle Against the US Dollar Amid Market Volatility**
*Adapted and expanded from an article originally published by VT Markets*
The Canadian Dollar (CAD) has faced steady pressure in recent weeks, continuing its downward trend against the US Dollar (USD). This depreciation is driven by a combination of domestic economic weaknesses, the strength of the Greenback, and broader global market forces. Despite occasional intraday recoveries, the CAD has been unable to sustain meaningful upward momentum as risk sentiment remains fragile and expectations surrounding interest rate differentials evolve.
Below, we examine in depth the drivers behind the Canadian Dollar’s recent depreciation, and analyze the broader context of USD/CAD price action and economic fundamentals influencing the pair.
## Key Drivers Behind CAD Weakness
A multitude of factors are contributing to the ongoing decline in the value of the Canadian Dollar. These include:
### 1. Divergent Central Bank Policies
– **Bank of Canada (BoC) monetary policy**: With inflation in Canada cooling more rapidly than in the US, the Bank of Canada has adopted a more dovish tone than the US Federal Reserve. On June 5, 2024, the BoC lowered its benchmark interest rate by 25 basis points to 4.75%, marking the first rate cut in four years. The move signaled that policymakers are comfortable with the disinflation trajectory and willing to ease monetary policy to support growth.
– **Federal Reserve stance**: In contrast, the US Federal Reserve continues to hold rates steady, signaling a prolonged period of elevated interest rates due to lingering inflationary pressure. Recent data from the US labor market and consumer prices have strengthened the case for keeping rates higher for longer.
These diverging policy paths have widened interest rate differentials between Canada and the United States, making USD-denominated assets more attractive to yield-seeking investors, which increases demand for the USD relative to the CAD.
### 2. Weak Canadian Economic Data
Canadian economic indicators have been mixed at best in early 2024, further reducing confidence in the domestic currency.
– **GDP growth**: Canada’s GDP growth has slowed in recent quarters. For the first quarter of 2024, Statistics Canada reported a 1.7% annualized expansion, which was below market expectations and far below pre-pandemic growth rates.
– **Labor market**: Although the labor market remains relatively stable, wage growth has decelerated. Unemployment rose to 6.2% in May 2024, suggesting some slack in the job market.
– **Inflation trends**: Canada’s Consumer Price Index (CPI) has shown signs of cooling, with the annual inflation rate moderating to 2.7% in May, down from 3.1% in April. While this is within the BoC’s target range, the subdued trend gives the central bank room to cut interest rates further if economic softness persists.
### 3. Falling Oil Prices
As one of the world’s major oil exporters, Canada’s currency is strongly correlated with crude oil prices. However, oil prices have been under downward pressure due to a combination of:
– Fears of slower global economic growth, particularly in China and Europe.
– Increased US shale oil production.
– Rising global inventories and soft demand forecasts from OPEC.
West Texas Intermediate (WTI), the US crude benchmark, recently fell below $75 per barrel, a key psychological support level. Weak oil prices reduce Canada’s export revenues and weigh on the national current account, further undermining CAD value.
### 4. US Dollar Strength
The US Dollar remains strong across the board due to its status as a safe-haven currency and the resilience of the US economy. Investors have piled into the USD amid:
– Strong US job creation: The US added 272,000 jobs in May, well above expectations.
– Higher inflationary pressures: Core PCE inflation, the Fed’s preferred inflation gauge, rose
Read more on USD/CAD trading.