The Canadian dollar stabilizes near its lowest level in four weeks amid low activity during the holidays.

Source: Fxstreet 2025-9-1 13:49

The USD/CAD pair ended a four-day downward trend, bouncing slightly due to the weakness of the Canadian dollar. The greenback stabilized after hitting a five-week low, amid reduced liquidity due to bank holidays in the United States and Canada. Overall sentiment towards the dollar remains fragile, due to concerns regarding trade policy and risks related to the independence of the Federal Reserve.

On Monday, the Canadian dollar (CAD) showed signs of weakness against the US dollar (USD), allowing the USD/CAD pair to rebound after previous losses, thus ending four consecutive days of decline. The pair moved higher during the day, benefiting from a moderate recovery of the US dollar, which had reached its lowest level in over a month during the Asian session.

At the time of writing, USD/CAD was trading around 1.3750 during the American session, remaining close to its lowest level in four weeks. Monday's price movements occurred against a backdrop of lackluster market conditions, with the United States and Canada celebrating Labor Day, resulting in low liquidity and reduced trading volumes. Despite the calm in the market, the reversal of the pair highlights a short-term shift in sentiment, with traders reevaluating their positions after the dollar's decline the previous week.

The dollar index (DXY), which tracks the value of the greenback against a basket of six major currencies, stabilizes after briefly hitting its lowest level in five weeks. The index remains firm above 97.50, with U.S. Treasury yields holding steady as traders await a busy macroeconomic calendar later in the week.

The overall sentiment towards the dollar remains fragile, with traders assessing a series of macroeconomic and political headwinds. Concerns about U.S. protectionist trade policies, combined with increasing political pressure on the independence of the Federal Reserve (Fed), continue to influence the trajectory of the central bank's monetary policy. According to CME's FedWatch tool, the market estimates a nearly 90% probability of a 25 basis point rate cut at the FOMC meeting on September 16 and 17.

Friday's PCE inflation data provided mixed signals - overall inflation remained stable while core PCE edged up slightly, complicating the policy outlook. Nevertheless, investors are increasingly focusing on the labor market, considering that the slowdown in hiring and low wage growth pose a more direct risk to the economy than persistent inflation.

This week's calendar includes several high-impact releases. The Purchasing Managers' Index (PMI) for the manufacturing sector in the United States and Canada will be released on Tuesday. In the United States, Wednesday's JOLTS job openings, Thursday's initial jobless claims, and Friday's non-farm payroll report (NFP) will be closely watched to confirm weakness in the labor market. Meanwhile, Canada's August employment report is also scheduled for Friday, which will significantly influence the Bank of Canada's (BoC) policy decision on September 17, especially after the unexpected GDP contraction in the second quarter has reignited speculation about new rate cuts.

Frequently Asked Questions about the Bank of Canada

What is the Bank of Canada and how does it influence the Canadian dollar?

The Bank of Canada (BoC), based in Ottawa, is the institution responsible for setting interest rates and managing monetary policy in Canada. The committee does this during eight scheduled meetings each year and during ad hoc emergency meetings if necessary. The main mission of the BoC is to maintain price stability, which means keeping the inflation rate between 1 and 3%. Its primary tool to achieve this is to raise or lower interest rates. Relatively higher rates generally lead to a strengthening of the Canadian dollar (CAD), and vice versa. Other tools used include quantitative easing and quantitative tightening policies.

What is quantitative easing (QE) and how does it affect the Canadian dollar?

In extreme circumstances, the Bank of Canada may implement a policy tool called quantitative easing. QE is the process by which the BoC prints Canadian dollars to purchase assets (typically government or corporate bonds) from financial institutions. QE generally leads to a depreciation of the Canadian dollar. It is a measure of last resort when simply lowering interest rates is unlikely to achieve the goal of price stability. The Bank of Canada used this measure during the financial crisis from 2009 to 2011, when banks lost confidence in each other's ability to repay their debts, leading to a credit freeze.

What is quantitative tightening (QT) and how does it affect the Canadian dollar?

Quantitative tightening (QT) is the opposite of quantitative easing. It occurs after QE, when the economy is recovering and inflation begins to rise. While in QE, the Bank of Canada buys government and corporate bonds from financial institutions to provide them with liquidity, in QT, the BoC stops buying more assets and ceases to reinvest the principal of the bonds it holds at maturity. This is generally favorable ( or bullish) for the Canadian dollar.

Warning: For informational purposes only. Past performance is not indicative of future results.