The Canadian dollar rose against the greenback for three straight days even as the currency faces the perfect storm. The USD/CAD pulled back to 1.4350, down from the year-to-date high of 1.4466.
Perfect storm for the loonie
The USD/CAD pair has soared by almost 20% from its lowest level in 2020, as the Canadian dollar struggles to recover.
First, the pair is soaring because of the stronger US dollar after the latest Federal Reserve interest rate decision. The dollar index, which tracks the currency’s performance against several developed country currencies, has risen for three consecutive months to $108.50, its highest level since November 2022.
The greenback has jumped as investors move from risky assets following Donald Trump’s victory in the last general election. It also jumped after the Fed hinted that it would deliver fewer interest rate cuts than previously thought in 2025.
Second, the USD/CAD pair has soared after the price of crude oil retreated. The West Texas Intermediate (WTI) has dropped by 4% this year and by almost 20% from the highest point in January. The Canadian dollar prefers higher oil prices because of the volume of oil that the country sells, mostly to the United States.
Third, Canada faces political risks after Chrystia Freeland resigned from the government earlier this week. As such, most analysts believe that if Justin Trudeau resigns as soon as this week, the country will go to an early election in the next few months. He has lost the support of most Canadians and even politicians.
Further, Canada’s inflation has fallen below the BoC’s target of 2.0%, pushing the central bank to continue cutting interest rates. The latest data showed that the headline Consumer Price Index (CPI) fell from 2.0% in October to 1.9% in November, missing the median estimate of 2.0%. Canada’s inflation has been in a freefall after peaking at 8.1% in 2022.
This inflation trend and the fact that the Canadian GDP is not growing, has pushed the BoC to deliver several large interest rate cuts. It slashed rates by 0.50% in the last monetary policy meeting on December 11, bringing the headline rate to 3.25%. Canada’s rates have fallen in the last five consecutive meetings.
Further, there are concerns about Donald Trump, who has vowed to end the USMCA deal he signed to replace NAFTA. He has hinted that he will impose large tariffs on Canadian imports, attracting retaliation. Trump has always been concerned about Canada’s goods deficit with the US.
He might also consider the tumbling Canadian dollar beneficial to the country because it lowers the cost of goods.
USD/CAD technical analysis
The USD/CAD pir has strongly surged in the past few years. It recently rose for four consecutive weeks, reaching its highest level since 2020.
The pair’s rally saw it rise above the key resistance level at 1.3978, its highest swing in October 2022 and the upper side of the ascending triangle pattern. This triangle is one of the most bullish patterns in technical analysis.
The pair has remained above the 50-week Volume-Weighted Moving Average, a positive move. Therefore, it will likely continue rising as buyers target the next key resistance level, 1.4666, its highest level since 2020. This target is about 2.20% above the current level.
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