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The exchange rate between the Canadian dollar (CAD) and the U.S. dollar (USD) has experienced notable fluctuations over the past few months, influenced by a combination of economic data, monetary policies, political events, and commodity prices. This report provides an analysis of these factors and their impact on the CAD/USD exchange rate.

Recent Exchange Rate Trends

As of May 1, 2025, the Canadian dollar was trading at 1.3850 per U.S. dollar, marking a 0.4% decline from the previous day. This dip followed a significant 4.3% gain in April, the largest monthly increase in a decade. The recent weakening was attributed to stronger-than-expected U.S. manufacturing data, which bolstered the U.S. dollar and yields.

Economic Indicators and Monetary Policy

The Bank of Canada (BoC) has maintained its benchmark interest rate at 2.75%, citing uncertainties related to trade tariffs that complicate economic forecasting. In contrast, the U.S. Federal Reserve has also been cautious, with recent data showing a less severe deterioration in the U.S. manufacturing sector than anticipated.

Canada's economy is particularly sensitive to interest rate changes due to high household debt levels, which stood at 184% of net disposable income in 2023, the highest among G7 countries. This sensitivity means that any adjustments in interest rates can have pronounced effects on consumer spending and, consequently, on the value of the Canadian dollar.

Political Developments

The recent Canadian federal election resulted in Prime Minister Mark Carney's Liberal Party retaining power but failing to secure a majority government. This outcome is expected to complicate efforts in negotiating tariffs with the U.S., adding a layer of political uncertainty that could influence the CAD/USD exchange rate. Analysts have expressed concerns that a minority government may hinder the passage of legislation and fiscal stimulus measures, potentially weighing on the Canadian dollar.

Commodity Prices

Oil prices, a significant driver of the Canadian economy, have seen volatility due to global trade tensions and geopolitical events. On April 17, 2025, oil prices surged by 3.5% to $64.63 per barrel following new U.S. sanctions limiting Iranian oil exports. This increase supported the Canadian dollar, contributing to its seventh consecutive weekly gain at that time.

Forecasts and Outlook

Analysts have mixed forecasts for the Canadian dollar. Some expect it to weaken slightly in the near term due to trade uncertainties and interest rate differentials but anticipate a recovery over the next year. A Reuters poll from October 2024 projected the loonie to edge lower to 1.3514 per U.S. dollar in three months but strengthen to 1.3275 within a year.

The exchange rate between the Canadian and U.S. dollars is influenced by a complex interplay of economic indicators, monetary policies, political developments, and commodity prices. While recent trends have shown both strengthening and weakening phases for the Canadian dollar, the overall outlook remains cautiously optimistic, contingent on global economic conditions and domestic policy decisions.