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USD/CAD extends slide as steady BoC expectations clash with Fed easing bets

  • USD/CAD trades near its lowest level since late September after Friday’s strong Canadian jobs data.
  • Traders expect the BoC to hold rates on Wednesday as recent data support a steady stance.
  • Markets also look ahead to the Fed decision, with expectations leaning toward a rate cut on Wednesday.

The Canadian Dollar (CAD) edges higher against the US Dollar (USD) on Monday, extending gains as investors continue to favour the Loonie on diverging expectations for the Bank of Canada (BoC) and the Federal Reserve (Fed).

At the time of writing, USD/CAD is trading near 1.3807, its lowest level since September 22, after falling nearly 0.95% on Friday following Canada’s stronger-than-expected employment report.

The BoC is widely expected to keep interest rates unchanged at 2.25% at Wednesday’s policy meeting, with recent economic data reinforcing the case for a steady stance.

Canada’s latest employment report showed another month of solid job creation and a noticeable drop in the Unemployment Rate. Statistics Canada reported that the economy added 53.6K jobs in November, well above expectations for a small decline, after a 66.6K increase in October. The unemployment rate fell to 6.5% from 6.9%, defying forecasts for a rise toward 7.0%.

Inflation trends remained mixed. Canada’s headline Consumer Price Index (CPI) eased to 2.2% YoY in October, slightly above the 2.1% consensus but lower than September’s 2.4%. On a monthly basis, CPI rose 0.2%, matching expectations and coming in just above the 0.1% increase recorded in September.

The BoC’s preferred underlying measures remained firm, with core CPI rising 0.6% MoM in October after a 0.2% increase in the previous month, while the annual rate edged up to 2.9% from 2.8%.

Growth indicators pointed to a modest rebound, with Gross Domestic Product (GDP) showing the economy regained some momentum in the third quarter. Statistics Canada reported that the economy expanded modestly in Q3, with September GDP rising 0.2% MoM in line with expectations.

Overall, real GDP rose 0.6% in Q3, reversing the -0.5% contraction in the second quarter, while the annualized growth rate jumped to 2.6%, far above the 0.5% consensus and a sharp improvement from the -1.8% recorded in Q2.

In the United States, the Fed will also announce its interest rate decision on Wednesday, with markets pricing in nearly an 87% probability of a 25 bps cut following mixed labour data, steady Personal Consumption Expenditures (PCE) inflation and a series of dovish-leaning remarks from policymakers.

Against this backdrop, USD/CAD remains biased lower as policy divergence continues to favour the Canadian Dollar ahead of mid-week central bank decisions.

Bank of Canada FAQs

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.

Author

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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