**Canadian Dollar Rebounds After Hitting Two-Month Low: What’s Driving the Turnaround?**
*By TradingView News Editors, with additional commentary and insights*
The Canadian dollar (CAD) showed signs of resilience this week after recently touching a two-month low. It managed to claw back some losses against the US dollar, responding to a mix of local and global economic signals. This turnaround in the loonie’s performance came amid evolving expectations around monetary policy in Canada and the United States, as well as ongoing developments in commodity markets, especially oil, which plays a pivotal role in Canada’s economy.
This in-depth analysis explores what’s behind the Canadian dollar’s recent rebound, the broader macroeconomic factors at play, and where the currency might be heading next.
## Recent Performance: From Weakness to Rebound
– The Canadian dollar had recently fallen to its weakest level against the US dollar since early February.
– On Thursday, it reversed course and showed modest gains, recovering from the recent low metric.
– The USD/CAD pair dropped 0.2%, settling around 1.3750 at the time of writing, signaling CAD strength.
– This move marked a short-term shift in momentum and improved investor sentiment toward the Canadian currency.
## Background: What Caused the Decline?
Over the past several weeks, several factors contributed to the Canadian dollar’s descent:
1. **Interest Rate Differentials:**
– The US Federal Reserve has maintained a firm tone on interest rates, reinforcing a higher-for-longer view on monetary policy.
– In contrast, the Bank of Canada has shown signs of potential rate cuts in 2024 due to weaker-than-expected economic growth domestically.
– This divergence between US and Canadian monetary policy has made the US dollar more attractive to investors.
2. **Economic Slowdown in Canada:**
– Canada’s GDP data showed subdued expansion in Q1 2024, with the annualized growth rate falling below expectations.
– Business investment and consumer spending have both lagged, placing added pressure on the Bank of Canada to ease policy.
– Analysts flagged housing market fatigue and credit growth deceleration as key drags on Canada’s post-pandemic recovery.
3. **Soft Inflation Data:**
– Canadian Consumer Price Index (CPI) data released recently showed inflation hovering near the Bank of Canada’s 2% target.
– With inflation cooling, markets began pricing in a higher probability of cuts by the central bank compared to the US Federal Reserve.
4. **Declining Oil Prices:**
– Crude oil, a top Canadian export, had been under pressure due to global demand concerns and a strengthening US dollar.
– As oil prices dipped, so did the loonie, underscoring the close correlation between the currency and energy markets.
## What Sparked the Rebound?
This week’s rebound in the Canadian dollar was prompted by a few key catalysts:
1. **Stabilization in Oil Prices:**
– Brent crude and West Texas Intermediate (WTI) prices stabilized after a multi-day slide.
– The Organization of the Petroleum Exporting Countries (OPEC) offered reassurances on production cuts, supporting crude benchmarks.
– Given that Canada is the fourth-largest oil producer in the world, this provided a tailwind for CAD.
2. **Reassessment of Rate Cuts:**
– Markets slightly dialed back expectations of immediate rate cuts by the Bank of Canada after more stable inflation readings in core segments.
– While a cut remains on the horizon, updated consumer spending and labor data hinted at lingering economic resilience.
3. **Weaker US Dollar Index (DXY):**
– The US dollar index retreated slightly from six-month highs, offering room for other major currencies like the CAD to regain ground.
– This coincided with US economic indicators signaling slowing retail sales and services activity.
4. **Global Risk Sentiment:**
– Investors re-engaged with
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