The Canadian dollar enters the new week at a crossroads, traders are weighing how fast the Federal Reserve will lower interest rates against a Bank of Canada that has already resumed easing.
Add in oil stuck near recent lows and domestic inflation that is edging closer to target, and the loonie’s direction looks set to be driven by policy divergence as much as commodity prices.
The Bank of Canada cut its overnight rate by a quarter point to 2.50 percent on September 17 and flagged October 29 as its next decision alongside fresh projections.
The statement framed the move as risk management, noting weaker growth and less upside pressure on prices.
The bank said it “reduced its target for the overnight rate by 25 basis points to 2.5 percent” and will proceed carefully from here.
South of the border, the Fed’s latest Summary of Economic Projections points to a lower policy path over time.
The median dot implies a federal funds rate around 3.6 percent at the end of 2025 and 3.4 percent in 2026, with a longer-run estimate of 3.0 percent.
That trajectory suggests room for more easing, but not a rush to the bottom, which keeps the dollar supported unless U.S. data weaken decisively.
Inflation dynamics in Canada are giving Ottawa some cover. Headline CPI rose 1.9 percent year over year in August, up from 1.7 percent in July. Excluding gasoline, prices increased 2.4 percent.
In its September deliberations summary, the Bank of Canada said earlier momentum in core inflation had cooled, with shorter-term measures drifting lower even as some preferred gauges hover near 3 percent.
Together, the readings support a cautiously easier stance without signaling a loss of price stability.
Front-month WTI settled near 60.88 dollars a barrel on Friday, while Brent ended around 64.53. Both benchmarks are well below midsummer levels after a week of declines tied to oversupply concerns.
A softer crude backdrop typically weighs on Canada’s terms of trade and, by extension, on the currency’s appeal during periods when yield support is fading.
The central bank highlighted a softer labor market and trade headwinds, and it is watching how household spending holds up as mortgage renewals bite.
The Bank of Canada’s Financial Stability Report estimates roughly 60 percent of outstanding mortgages will roll over in 2025 and 2026, with most of those borrowers facing higher payments than during the pandemic lending boom.
That adjustment should restrain consumption and keep growth subdued.
A durable recovery in crude would improve Canada’s export earnings and usually supports the currency, but that tailwind has been unreliable.
With daily exchange rates published each business day in the afternoon by the central bank, investors will be gauging whether policy headlines or energy prices carry more weight session by session.
Hedging CAD exposure around policy dates makes sense, and corporate treasurers with cross-border payables should keep an eye on the Fed’s dots and the Bank of Canada’s guidance as much as on the oil screen.
Until there is a decisive shift in either policy or crude, the loonie’s path looks choppy rather than directional.
