The Canadian dollar remained stable against its U.S. counterpart on Thursday as market participants awaited crucial employment data, which could influence monetary policy decisions by the Bank of Canada (BoC) and the U.S. Federal Reserve.
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Loonie Holds Ground Amid Market Uncertainty
The Canadian dollar traded at 1.4310 per U.S. dollar (69.88 U.S. cents), experiencing minimal fluctuations within a range of 1.4304 to 1.4366 throughout the session. This steadiness comes after a significant rebound from Monday’s 22-year low of 1.4793, following Canada’s temporary relief from immediate U.S. trade tariff implementation.
Market analysts suggest that short-term range-bound trading is likely. According to Shaun Osborne, chief currency strategist at Scotiabank, positioning in the market remains heavily short on the CAD, meaning a positive shift in trade news could trigger a sharp rebound. However, he cautions that the yield disadvantage of the Canadian dollar remains a hurdle to any significant recovery.
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Interest Rate Divergence Between Fed and BoC Weighs on CAD
The Bank of Canada has been cutting interest rates more aggressively than the U.S. Federal Reserve, contributing to the largest Canada-U.S. 2-year yield gap since September 1997—a spread of approximately 160 basis points. This difference in monetary policy direction has placed downward pressure on the Canadian dollar.
Key Economic Data on the Horizon
Investors are awaiting the January employment report, set for release on Friday, which could impact market sentiment. Economists predict that Canada added 25,000 jobs, a significant slowdown compared to the 91,000 jobs added in December.
Additionally, Ivey Purchasing Managers Index (PMI) data released Thursday revealed that Canadian economic activity contracted for the first time in five months. Slower employment growth and rising prices contributed to the decline, raising concerns about the country’s economic trajectory.
Trade Tariffs and Oil Prices Add to Currency Volatility
Despite recent relief from immediate U.S. trade tariffs, the potential for future restrictions continues to pose a risk to the Canadian dollar’s outlook. A Reuters poll suggests that while the loonie could weaken in the near term, it is expected to regain strength and trade at a higher level within a year.
Meanwhile, oil prices—a key driver of the Canadian economy—were down 0.5% to $70.69 per barrel. Despite this dip, Canadian bond yields moved higher, with the 10-year yield rising 4.3 basis points to 2.994%.
Looking Ahead: Will the Canadian Dollar Recover?
The trajectory of the Canadian dollar will depend on multiple factors, including employment figures, interest rate policies, trade negotiations, and commodity prices. If Canada’s labor market remains strong and trade tensions ease, the loonie could see renewed strength in the coming months.
For now, traders remain cautious as they navigate a complex economic landscape filled with uncertainties and shifting monetary policies.
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