USD/CAD price action: CAD hits record lows against US dollar
The Canadian dollar hits record lows amid political uncertainty and a 50bps BoC rate cut, while the Fed remains optimistic, supporting USD strength. Monitor economic shifts for USD/CAD trends.
Key points
- USD/CAD reaches 1.42309, lowest CAD level since March 2020
- Canadian Finance Minister resigns amid tariff policy disputes
- Bank of Canada cuts interest rate by 50bps to 3.25%
- Fed optimistic on inflation and labor market, hints at gradual cuts
- Potential US tariffs and economic data impact CAD's outlook
USD/CAD hits above 1.4200
The Canadian dollar sunk to its lowest level against the dollar since March of 2020, with the pair hitting 1.42309. Recently, Canadian Finance Minister Chrystia Freeland announced her resignation from Prime Minister Justin Trudeau’s cabinet due to disagreements over handling incumbent US President-elect Donald Trump’s potential tariff policies on Canada. This marks the second time in four years that a finance minister has left Trudeau’s cabinet, leading to further softening of the CAD due to political and economic uncertainty.
USD/CAD price history
Bank of Canada makes second consecutive interest rate cuts
Last week, the Bank of Canada (BoC) cut its key interest rate by 50-basis points (bps) to 3.25%. This marks the second consecutive cut and totals 175bps from the cycle’s peak of 5%. Although this move met expectations, officials indicated that there won't be more aggressive cuts next year if conditions hold. The decision followed third-quarter data showing 1% GDP growth, falling short of expectations. However, consumer spending was stronger than expected. The BoC expects inflation to stay around the 2% target in the coming years, although potential tariffs from the new US administration create uncertainty for price growth.
US Fed officials express optimism ahead of FOMC rate decisions
The Federal Reserve's November meeting revealed that officials are optimistic about US inflation and a strong labor market, potentially allowing for further interest rate cuts at a slower pace. They emphasized that monetary policy should be responsive to present economic conditions, warning against rushing into rate cuts prematurely due to recent data volatility and uncertainties over the neutral interest rate's effects. Some officials recommended maintaining higher rates if inflation remains, while others favored quicker cuts if the labor market were to weaken.
What’s next for USD/CAD?
Recent weakness in the Canadian dollar can be attributed to political and economic uncertainties, including the recent resignation of Finance Minister Chrystia Freeland. This political instability, coupled with the Bank of Canada's recent 50bps rate cut to 3.25%, has led to further pressure on the CAD. Although the BoC has signaled a halt to aggressive future rate cuts, the economic data backdrop of below-expected GDP growth and potential US tariffs add to the uphill battle for the loonie.
On the other hand, Fed officials are positive about the US inflation trajectory and labor market strength, suggesting only gradual rate cuts ahead in the short-term. This contrast in economic outlooks and policy directions between the US and Canada could further drive USD/CAD's bullish momentum.
Looking forward, USD/CAD may continue its upward trajectory if Canadian political and economic uncertainties persist, and the US dollar remains strong due to the Fed's stance. Traders should monitor developments regarding potential tariffs, inflation data, and economic indicators in both countries for further insights into the pair's direction.
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