The USD/CAD pair retreated from its recent gains on Monday, trading around 1.4190 during the Asian session. The decline is driven by a weaker US Dollar (USD), following disappointing US economic data, including Jobless Claims and the S&P Global Purchasing Managers’ Index (PMI), which reinforced expectations of Federal Reserve (Fed) rate cuts.
US Dollar Weakness and Fed Rate Cut Expectations
The US Dollar Index (DXY) dropped near 106.00, while US Treasury bond yields remained subdued, with the 2-year yield at 4.19% and the 10-year yield at 4.43%. The softer data has fueled speculation that the Fed may ease monetary policy sooner than expected.
Canada’s Economic Uncertainty and BoC Outlook
Mixed economic indicators have cast doubt on the Bank of Canada’s (BoC) policy trajectory:
Retail Sales: An advance estimate from Statistics Canada showed a 0.4% decline in January 2025, marking the first contraction in seven months and raising concerns over slowing consumer demand.
Inflation Pressures: Rising industrial producer prices and an increase in the Raw Materials Price Index highlight persistent inflationary pressures, complicating the BoC’s decision-making on monetary policy.
Canadian Dollar Faces Headwinds from Falling Oil Prices
The commodity-linked Canadian Dollar (CAD) remains under pressure due to a decline in West Texas Intermediate (WTI) crude oil prices. Canada, the largest oil exporter to the US, is impacted by oil market volatility, particularly after news that Iraq plans to resume exports from Kurdistan’s oilfields.
On Sunday, Reuters reported that an Iraqi Oil Ministry official confirmed plans to export 185,000 barrels per day (bpd) via the Iraq-Turkey pipeline. The resumption of these exports has weighed on oil prices, potentially limiting gains for the CAD.
USD/CAD Outlook
The USD/CAD pair remains in focus as market participants weigh Fed rate cut expectations against BoC policy uncertainty and oil price movements. While the USD faces downward pressure, lingering inflation in Canada and weaker crude prices could challenge further CAD appreciation.
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