Loonie Rises as USD/CAD Retreats on Macro, Geopolitics

Key Moments

USD/CAD has declined about 0.6% over two days, extending its pullback from 1.3928 toward lows near 1.3820.
Geopolitical tensions, including U.S. tariff threats and EU-U.S. trade frictions, have fueled a broad “Sell America” theme.
Canadian CPI surprised to the upside in December, while the BoC’s preferred CPI gauge eased, supporting expectations for a policy pause.

USD/CAD Under Pressure as Dollar Slide Continues

The U.S. Dollar remained on the defensive against the Canadian Dollar for a second straight session on Tuesday. USD/CAD extended its recent downswing from highs at 1.3928, trading down to session lows around 1.3820 and marking a cumulative loss of roughly 0.6% over the past two trading days.

Among major currencies, the U.S. Dollar has delivered the weakest performance so far this week. The move comes as U.S. President Donald Trump marks his first year in office, reiterating his intention to take control of Greenland and signaling plans to raise trade tariffs on all countries that oppose these policies. These developments have contributed to a broader “Sell America” trade across markets.

Geopolitical Backdrop and U.S. Trading Conditions

U.S. market participants are returning from an extended weekend following Martin Luther King Jr. Memorial Day. With the domestic data calendar offering little beyond the ADP Weekly Employment report, investors are focused on rising geopolitical tensions to guide positioning. Market attention is also turning to Trump’s scheduled speech at the Davos meeting on Wednesday, with participants waiting for further clarity on trade and geopolitical rhetoric.

Canadian Inflation Dynamics and BoC Outlook

In Canada, the latest Consumer Price Index release on Monday showed that headline inflation accelerated in December. CPI rose to 2.4% year-on-year, surpassing expectations for an unchanged 2.2% annual rate. The report pointed to firmer price pressures than markets had anticipated.

However, the Bank of Canada’s preferred BoC CPI measure eased slightly, slowing to 2.8% year-on-year in December from 2.9% in November. This moderation in the central bank’s favored gauge is seen as giving policymakers room to keep interest rates steady over the coming months, despite the upside surprise in the headline CPI figure.

Indicator	Period	Latest Reading	Previous	Market Expectation	Implication
USD/CAD exchange rate	Last two days	Low near 1.3820	High at 1.3928	N/A	About 0.6% decline in the pair
Canada CPI (YoY)	December	2.4%	2.2% (implied prior expectation)	2.2%	Stronger-than-expected inflation
BoC CPI (YoY)	December	2.8%	2.9%	N/A	Supports view of a BoC policy pause

Canadian Dollar: Core Drivers and Market Sensitivities

The Canadian Dollar (CAD) is influenced by several key macro and market variables. Interest rates set by the Bank of Canada (BoC), the trajectory of Oil prices, overall economic performance, inflation trends, and Canada’s Trade Balance – defined as the gap between export and import values – all play central roles. Broader risk sentiment is another important driver: a risk-on environment tends to favor CAD, while risk-off dynamics often weigh on the currency. Given the tight economic relationship between Canada and the United States, developments in the U.S. economy are also a critical input for CAD valuation.

Role of the Bank of Canada in CAD Movements

The BoC shapes the interest rate environment by setting the rate at which financial institutions lend to one another, indirectly impacting borrowing costs throughout the economy. Its primary mandate is to maintain inflation within a 1-3% range, adjusting interest rates as needed to achieve that goal. Relatively higher interest rates are typically supportive for the Canadian Dollar.

Beyond rate policy, the BoC can deploy quantitative easing or quantitative tightening to alter credit conditions. Quantitative easing is generally seen as negative for CAD, while quantitative tightening is typically viewed as positive for the currency.

Oil Prices, Inflation, and Macro Data: Additional CAD Catalysts

Oil prices are a central factor for CAD, as petroleum represents Canada’s largest export. Moves in Oil prices tend to have a rapid impact on the currency. Rising Oil prices often coincide with CAD appreciation due to higher overall demand for the currency, and they can also improve the Trade Balance, further underpinning CAD. Conversely, falling Oil prices usually exert downward pressure on the Canadian Dollar.

Inflation data also plays a significant role. In the current environment, higher inflation often leads central banks to raise interest rates, attracting capital inflows from investors seeking higher yields. For Canada, stronger inflation can thus bolster CAD by increasing the likelihood of tighter monetary policy.

Broader economic indicators – including GDP, Manufacturing and Services PMIs, labor market data, and measures of consumer sentiment – help investors assess the underlying health of the Canadian economy. Robust data can attract foreign investment and may prompt the BoC to consider higher interest rates, both of which are supportive of the Canadian Dollar. Weaker figures, in contrast, tend to weigh on the currency as they reduce expectations for policy tightening and deter capital inflows.