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Canadian Dollar Stuck in Neutral: What’s Next for USD/CAD?

By January 23, 2025No Comments

After a frenzied start to the week, which saw the U.S. Dollar drop by over 1% in the lead-up to anticipated tariff announcements on President Trump’s inauguration day, the dollar quickly regained its strength once it became clear that there would be a reprieve on the tariff decision. Now, the Canadian dollar (CAD) finds itself stuck in what analysts call a “consolidation phase” against the U.S. dollar (USD).

Simply put, the CAD is going nowhere fast, with the USD/CAD exchange rate circling the 1.4400 mark without much excitement. Midweek trading has been especially quiet, with only minor shifts, such as Wednesday’s modest 0.35% move.

What’s Going On?

Right now, traders seem indecisive. On one hand, the U.S. dollar remains strong, buoyed by a robust American economy and higher interest rates. On the other hand, the Canadian dollar is struggling to find its footing.

The looming threat of broad tariffs and their potential impact on the Canadian economy has overshadowed other key factors—like the diverging interest rate policies of the Bank of Canada and the Federal Reserve. With no major tariff decisions expected until February or even April, this sideways grind in the USD/CAD exchange rate could persist for some time.

Why Does It Matter?

The USD/CAD exchange rate is a critical indicator for businesses, investors, and travelers alike. A weaker CAD means importing goods becomes more expensive for Canadians, and travelers heading to the U.S. get less value for their money.

For businesses involved in cross-border trade, this stuck-in-neutral phase complicates planning and budgeting. More broadly, the U.S.-Canada tariff discussions are viewed as a bellwether for global trade. Whatever happens between these two close trading partners could set the tone for more aggressive tariff policies on other nations, such as China or Russia.

Topside Pressure: A Struggle for the Loonie

Here’s the kicker: Despite signs that the U.S. dollar is overbought (indicating it’s due for a correction), the Canadian dollar hasn’t taken the opportunity to push back. Instead, USD/CAD continues flirting with multi-year highs.

Technical indicators—those beloved charts traders use—show a lack of momentum. The Canadian dollar has essentially become the proverbial “hot potato,” with traders hesitant to hold it if a trade war erupts between Canada and the U.S.

Key Factors at Play

  • U.S. Interest Rates: The Federal Reserve’s higher rates are attracting global investors, keeping the U.S. dollar in demand. Higher returns from these rates make the greenback more appealing.
  • Canada’s Interest Rates: The Bank of Canada has taken a more cautious approach, even hinting at potential rate cuts to support a struggling economy. Lower rates generally mean less demand for the CAD.
  • Economic Uncertainty: While the U.S. benefits from a stronger economy overall, Canada’s economy has been lackluster. Add in global uncertainty and potential tariff wars, and it’s no surprise traders favor the stability of the greenback.

What’s Next for USD/CAD?

So, what’s the outlook? If the Canadian dollar doesn’t find a catalyst soon, it risks testing new lows. Traders are closely monitoring key economic reports and central bank statements for any signs of a breakout from the current back-and-forth grind. For now, the USD/CAD pair seems content to hover around the 1.4400 mark.

That doesn’t mean volatility is off the table. With President Trump, the unexpected is always a possibility, and markets could move rapidly in response to any surprises.

The Canadian dollar is currently trading at 1.4368 CAD against the US Dollar.



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