USD/CAD holds above 1.4150 ahead of BoC rate decision
- USD/CAD trades in positive territory for the third consecutive day around 1.4170 in Tuesday’s early Asian session.
- The Fed is likely to cut rates next week, but the outlook is to tilt hawkish, supporting the USD.
- The BoC is expected to cut its overnight rate by 50 bps on Wednesday.
The USD/CAD pair extends its upside to near 1.4170 on the firmer US Dollar (USD) and higher US yields during the early Asian session on Tuesday. The US NFIB Business Optimism Index and Unit Labor Costs are due later on Tuesday.
Friday's US November employment data showed the labor market is cooling but not so robust as to rule out a rate cut from the Federal Reserve (Fed) next week. The US central bank started its interest rate easing cycle with a jumbo 50 basis points (bps) cut in September, followed by a 25 bps cut in November. Traders are now pricing in nearly an 88% chance of Fed rate reductions by a quarter of a percentage point on December 18, according to the CME FedWatch Tool.
"The Fed should be in a position to move forward on the December rate cut, but CPI report now becomes another significant milestone in the policy-adjustment calculus," noted Rick Rieder, BlackRock chief investment officer of global fixed income.
Despite the rising bets for a Fed rate cut in December, market players remain focused on the cautious stance of the Fed officials, which might lift the Greenback against the Canadian Dollar (CAD). San Francisco Fed President Mary Daly noted on Friday that the US central bank will still step in with additional rate hikes if price growth begins to spiral once again.
On the Loonie front, the Bank of Canada (BoC) interest rate will be closely watched. The BoC is anticipated to deliver a 50 bps reduction on Wednesday after the same move in October, bringing the benchmark rate to 3.25%. Nonetheless, the recovery in crude oil prices might help limit the CAD’s losses, as Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive impact on the CAD value.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
