The USD/CAD currency pair is experiencing a decline, trading around 1.4395 during the Asian session on Friday. This movement is largely influenced by a combination of factors, including an encouraging performance in Canada’s manufacturing sector and soaring crude oil prices, which bolster the Canadian Dollar (CAD). The Canadian Purchasing Managers Index (PMI) for December registered an increase to 52.2, up from 52.0 in November, marking the highest reading since February 2023 and surpassing expectations of 51.9.
In addition to positive PMI data, the rise in crude oil prices is providing a tailwind for the CAD. As Canada stands as the largest oil supplier to the United States, elevated oil prices tend to enhance the value of the Canadian Dollar, contributing to its resilience against the US Dollar.
Despite these supportive factors, the CAD faces challenges posed by potential US tariffs and ongoing domestic political uncertainties. The threat of a 25% tariff on goods from Canada and Mexico has been suggested, contingent upon both nations’ efforts to manage illegal migration and the flow of fentanyl into the United States. Such developments could create downward pressure on the CAD, affecting the overall USD/CAD pairing.
Further complicating the currency dynamics is the Federal Reserve’s decision to lower the federal funds rate by 25 basis points in its December meeting, adjusting the target range to 4.25% – 4.50%. While this indicates a cautious approach to monetary policy, the prospect of fewer rate cuts than previously anticipated may strengthen the US Dollar in the coming weeks. Recent communications from the Fed have indicated a shift in outlook regarding rate cuts for 2025, now projecting only two rate reductions compared to earlier forecasts.
Traders are poised to digest upcoming US economic data, particularly the Manufacturing PMI for December, which could provide crucial insights into the state of the economy and further influence expectations about Fed monetary policy movements in the near future.
