The exchange rate between the Canadian dollar (CAD) and the US dollar (USD) is primarily determined by market forces of supply and demand in the foreign exchange market. Factors such as economic data, interest rates, inflation, and geopolitical events influence the demand for each currency and thus affect their exchange rate.
Differences in interest rates set by the Bank of Canada and the Federal Reserve can impact the CAD to USD exchange rate. Higher interest rates in Canada relative to the US tend to attract foreign capital, increasing demand for the Canadian dollar and potentially strengthening its value against the US dollar.
Canada is a major exporter of commodities such as oil, natural gas, and minerals. Fluctuations in commodity prices, particularly oil prices, can significantly influence the Canadian economy and consequently affect the CAD to USD exchange rate. Rising commodity prices often strengthen the Canadian dollar due to increased export revenues.
Economic indicators such as GDP growth, employment data, trade balances, and consumer confidence levels in both Canada and the United States play a crucial role in determining their respective currencies' strength. A robust Canadian economy relative to the US may lead to a stronger CAD against the USD and vice versa.
Political stability and government policies also impact exchange rates. Stable political environments and prudent fiscal policies generally instill confidence in a currency, attracting investors and supporting its value. Any political uncertainty or policy changes can lead to currency volatility.
Canada and the United States have a significant trading relationship, with cross-border trade influencing currency demand. Trade imbalances and tariffs can affect the CAD to USD exchange rate, as changes in trade policies can impact the flow of goods and services between the two countries, thereby affecting demand for their currencies.
Occasionally, central banks may intervene in the foreign exchange market to influence their currency's value. The Bank of Canada and the Federal Reserve may conduct interventions to stabilize exchange rates or address economic imbalances, although such interventions are less common in freely floating exchange rate regimes.
Events and trends in the global economy, such as economic growth in major economies, geopolitical tensions, and market sentiment, can affect investor confidence and currency movements. Changes in global economic conditions may indirectly impact the CAD to USD exchange rate.