The Canadian dollar (CAD) strengthened to approximately 1.41 per USD in December, recovering from a 4.5-year low of 1.418 reached on December 10. This rebound follows signals from the Bank of Canada (BoC) about a slower pace of future rate cuts after its recent 50-basis-point reduction.
Key Factors Driving the Loonie’s Recovery
- BoC’s Policy Shift:
- Markets had already priced in the recent rate cut, shifting their focus to the central bank’s more cautious outlook for future monetary policy.
- The BoC’s tempered stance provided stability, reassuring investors and supporting the loonie.
- Fiscal Measures:
- Government initiatives, including a sales tax holiday and measures to combat inflation, are expected to bolster short-term economic growth.
- These steps further instilled confidence in the Canadian economy.
- U.S. Federal Reserve Developments:
- Expectations for a Federal Reserve rate cut grew as U.S. inflation data met forecasts.
- This created a more favorable environment for the Canadian dollar by reducing the greenback’s dominance.
Outlook for the Canadian Dollar
While the BoC’s policy rate remains lower than the U.S. Federal Reserve’s, its measured approach signals a stabilization that could help maintain the loonie’s strength. Fiscal measures and improving investor sentiment may further support the CAD in the near term.
