The US dollar-Canadian dollar (USDCAD) pair is facing pressure from two different directions. In Canada, the central bank is preparing to raise interest rates. At the same time, falling technology stocks in the US are pushing investors to move their money into safer investments. Both events help explain why the USDCAD price is struggling right now.
Recent data shows that Canadian inflation went up, mostly because of higher energy prices. Even though core inflation, which excludes volatile items like food and energy, slowed down, prices could still rise further. This is due to ongoing global conflicts keeping oil prices high and fears of new US tariffs.
To stop prices from rising too fast, the Bank of Canada (BoC) is taking a strict approach. Markets expect the BoC to raise its main interest rate to 2.50% at its meeting next week. Interest rates matter for currencies because higher rates typically offer better returns for investors. This expectation of higher rates is currently making the Canadian dollar stronger.
In the US, inflation has also gone up recently. However, the US Federal Reserve (the Fed) is handling it differently. Markets expect the Fed to leave interest rates unchanged at its meeting this month. The Fed wants to wait and see how its previous policy changes from September affect the economy before making its next move in December.
At the same time, investors have been heavily selling technology shares. When the stock market drops, investors often look for a safe place to protect their wealth. Recently, this panic has driven them to buy US long-dated Treasury bonds. This sudden rush for safety, combined with the Fed deciding to pause its rate changes, adds to the complex situation impacting the US dollar.
That leaves two questions for markets: whether the BoC will actually raise rates next week, and how long the panic in the stock market will last.
“The USDCAD is falling because of two conflicting trends. Canada is fighting inflation with higher interest rates, which makes the Canadian dollar stronger. Meanwhile, falling tech stocks are pushing US investors to hide their money in government bonds. This combination puts heavy downward pressure on the currency pair from both sides,” -Van Ha Trinh, Financial Markets Strategist at Exness.
All eyes will now be on the Bank of Canada’s interest rate decision next week, the Fed’s upcoming meeting, and the stock market. The Canadian rate decision will confirm the new cost of borrowing, while the Fed’s actions and stock market trends will show whether investors feel confident enough to buy the US dollar again.