Key Factors Influencing the CAD: The BoC’s Interest Rates

The value of the Canadian Dollar (CAD) is influenced by several key factors, especially the Bank of Canada (BoC)’s interest rates. The BoC aims to keep inflation between 1% and 3%. Additionally, the price of oil, Canada’s main export, significantly impacts the CAD’s value. Economic indicators like GDP, employment rates, and consumer confidence also play a role. A strong economy often leads to higher interest rates, which can boost the CAD, while weak economic data may weaken it. The BoC can impact the CAD through its interest rate decisions, with higher rates generally favoring the currency. Economic reports, such as GDP growth and Purchasing Managers’ Index (PMI) figures, are important in determining the Canadian Dollar’s direction. When oil prices rise, the CAD typically strengthens because of Canada’s reliance on oil exports. Recently, Canadian inflation data was higher than expected at 2.4% in September. This puts the BoC in a tough spot because it makes it harder to lower interest rates while the economy shows weakness. Statistics Canada reported a modest GDP growth of just 0.8% for Q2 2025, indicating a slowdown.

Central Bank Policies: A Clear Divide

There is a noticeable difference in central bank policies that is affecting currency markets. Overnight index swaps suggest a 65% chance of the BoC cutting rates in December. In contrast, the U.S. Federal Reserve is hinting at maintaining higher rates for an extended period, with futures markets not expecting cuts until mid-2026. This gap in policies is a major reason the US Dollar is gaining strength against the Canadian Dollar. The USD/CAD chart shows a solid upward trend, bolstered by a “golden cross” formation earlier this month. Significant resistance is seen around the 1.4100 level, which has limited recent upward movements. If the price pulls back to the support area between 1.3900 and 1.3950, this could present opportunities to join the trend. It’s important to note that oil, a crucial Canadian export, isn’t providing much support right now. West Texas Intermediate (WTI) crude has struggled to stay above $85 per barrel due to growing concerns over slowing global demand, especially from Asia. This weakness in the energy market puts additional pressure on the loonie, making it harder for it to strengthen. For traders using derivatives, the current outlook favors strategies that benefit from a stronger USD/CAD. Buying call options on USD/CAD with upcoming expiry dates can allow you to participate in this upward trend. Implementing a bull call spread could also effectively reduce premium costs while targeting a move toward the 1.4100 resistance level and managing risk. Create your live VT Markets account and start trading now.

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