Title: Is the Canadian Dollar Starting to Recover? A Deep Dive into the USD/CAD Outlook
Original Author: Matt Weller, FOREX.com
Expanded and Updated by AI, including insights from Bloomberg, Reuters, and DailyFX
The USD/CAD currency pair has been one of the most watched crossing pairs in recent weeks as the Canadian dollar (CAD) appears to be finding some footing after a prolonged period of weakness against the US dollar (USD). Several economic, geopolitical, and technical factors are converging to suggest that a potential recovery in the Canadian dollar may be underway. However, the outlook remains mixed, heavily influenced by interest rate differentials, commodity prices, and monetary policy expectations in both countries.
In this article, we’ll delve into:
– Recent USD/CAD price action
– Key economic data influencing both currencies
– Outlook for Bank of Canada (BoC) and Federal Reserve (Fed) policy
– The impact of oil prices on the loonie
– Technical analysis and key levels to watch
– What traders should monitor going forward
Let’s explore each of these areas in detail.
Recent USD/CAD Price Action
In recent weeks, the USD/CAD pair has been trading in a consistent uptrend, approaching 1.3800, a key resistance level last reached in late 2023. This implies relative weakness in the Canadian dollar as the greenback benefits from safe-haven flows and interest rate advantage.
However, momentum has shown signs of slowing:
– As of early April, USD/CAD has struggled to maintain upward momentum above 1.3700
– Bearish divergence is evident between the price action and the Relative Strength Index (RSI), suggesting a possible reversal
– Short-term support for USD/CAD sits around 1.3600
– A break below this level could signal that buyers are losing control, possibly setting the stage for CAD appreciation
Key Economic Drivers for USD and CAD
Both currencies remain sensitive to macroeconomic data, especially as monetary policy decisions are increasingly data-dependent.
United States (USD):
The US dollar has been supported by:
– Persistent inflationary pressures keeping the Federal Reserve’s interest rates elevated
– Robust labor markets, including March nonfarm payroll figures showing 303,000 jobs added
– Strong consumer spending holding up in key economic releases
– Fed officials, such as Jerome Powell, signaling patience in cutting interest rates
Given inflation staying above the 2 percent target and economic growth remaining resilient, expectations for rate cuts in 2024 have diminished. Earlier market pricing suggested 3–4 cuts starting as soon as mid-2024. However, after the March inflation report and strong employment data, consensus has shifted toward perhaps one or two cuts, potentially delayed until Q4.
Canada (CAD):
For the Canadian dollar, recent data has also surprised to the upside:
– February inflation increased slightly to 2.8 percent year-over-year, up from 2.7 percent in January
– Core inflation metrics, including the BoC’s preferred Median and Trim measures, have shown signs of stickiness
– The Canadian labor market added 41,000 jobs in March, exceeding expectations and lowering the unemployment rate to 5.7%
This gives the Bank of Canada some breathing room, even though economic growth has been softer than in the United States. For the CAD to gain ground, further economic resilience may be necessary to push back against BoC rate cut expectations.
Interest Rate Expectations: Bank of Canada vs. Federal Reserve
One of the major drivers in USD/CAD is the interest rate differential. Higher interest rates tend to attract foreign investment, leading to currency appreciation.
As of now:
– The Federal Reserve’s benchmark interest rate stands at 5.25–5.50 percent
– The Bank of Canada’s policy rate is at 5.00 percent
Markets are pricing in different paths for these two central banks:
– Fed rate cuts are likely to begin later in 202
Read more on USD/CAD trading.