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The USD/CAD exchange rate has experienced notable fluctuations over the past few months, influenced by a combination of economic indicators, monetary policies, and geopolitical events. As of May 1, 2025, the Canadian dollar (CAD) weakened by 0.4% to 1.3850 against the U.S. dollar (USD), reversing some of its substantial gains from April. This report delves into the factors contributing to these movements and provides an outlook for the USD/CAD currency pair.

Recent Exchange Rate Movements

In April 2025, the Canadian dollar appreciated by 4.3% against the U.S. dollar, marking its most significant monthly gain in a decade. This surge was primarily driven by expectations of economic recovery and favorable trade conditions. However, on May 1, the loonie gave back some of these gains, trading at 1.3850 per USD. The decline was attributed to stronger-than-expected U.S. manufacturing data, which bolstered the U.S. dollar and yields. Despite this pullback, analysts like Erik Bregar of Silver Gold Bull maintain that the Canadian dollar remains in an overall uptrend, trading below its 200-day moving average of approximately 1.40.

Economic Indicators and Their Impact

U.S. Manufacturing Data: The Institute for Supply Management (ISM) reported that its manufacturing PMI dropped to 48.7 in April, better than the forecasted 48.0. This data provided a boost to the U.S. dollar, as it suggested a more resilient manufacturing sector than anticipated.

Canadian Manufacturing Activity: Conversely, Canadian manufacturing experienced its sharpest contraction since May 2020, with the S&P Global Canada Manufacturing PMI falling to 45.3 in April. This decline was influenced by concerns over U.S. trade policy, which weighed on production and new orders.

Employment Data: In February, Canadian payroll employment fell by 49,000, and the growth of average weekly earnings slowed to 5.4% year-over-year. These figures indicate potential challenges in the labor market, which could impact consumer spending and economic growth.

Monetary Policy Divergence

Bank of Canada (BoC): The BoC has been on a path of monetary easing, reducing its benchmark interest rate by 75 basis points since June 2024 to 4.25%. These rate cuts aim to stimulate economic growth but have also made Canadian assets less attractive to foreign investors, exerting downward pressure on the CAD.

U.S. Federal Reserve (Fed): The Fed began its easing campaign in September 2024, following a more cautious approach. The divergence in monetary policies between the BoC and the Fed has contributed to fluctuations in the USD/CAD exchange rate, as investors seek higher yields offered by U.S. assets.

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 introduces political uncertainty, which can influence investor sentiment and, consequently, the exchange rate. Analysts have expressed concerns that a minority government could complicate policy implementation, particularly in areas like trade negotiations with the U.S.

Commodity Prices and Trade Relations

Canada's economy is heavily reliant on commodity exports, particularly oil. Fluctuations in oil prices directly impact the CAD. In April, oil prices settled 1.5% lower at $62.05 a barrel due to global trade tensions, which can negatively affect the Canadian dollar.

Additionally, ongoing uncertainties in U.S.-China trade negotiations have contributed to a general retreat in the U.S. dollar, providing some support to the CAD. However, the looming threat of U.S. tariffs on Canadian goods adds a layer of uncertainty to the trade relationship, potentially impacting the exchange rate.

Technical Analysis

From a technical perspective, the USD/CAD pair has been trading within an upward channel, recently testing resistance at 1.4440. A break above the psychological 1.4500 level could drive further upward movement toward key long-term resistance at 1.4667. Conversely, near-term support is established at 1.4280 and 1.4192. A break below these levels may indicate a potential trend reversal and entry into a more prolonged corrective phase.

Outlook

Analysts have mixed forecasts for the USD/CAD exchange rate. Some predict a slight decline in the coming months due to trade uncertainties and interest rate differentials, with expectations of the loonie weakening to 1.44 per USD in three months. Others anticipate a recovery, projecting the CAD to strengthen to 1.3275 per USD within a year, driven by lower borrowing costs bolstering economic growth.

In summary, the USD/CAD exchange rate is influenced by a complex interplay of economic indicators, monetary policies, political developments, and commodity prices. While recent data suggests a weakening of the Canadian dollar, underlying factors such as monetary policy divergence and trade relations will continue to play pivotal roles in shaping the currency pair's trajectory in the coming months.