- USD/CAD enters a bullish consolidation phase near a one-month top set on Thursday.
- Reduced bets for a 50 bps Fed rate cut boost the USD and lend support to the major.
- Bullish Oil prices underpin the Loonie and cap the pair ahead of the key US NFP report.
The USD/CAD pair struggles to capitalize on the previous day's strong move up to a one-and-half-week top and oscillates in a range around mid-1.3500s during the Asian session on Friday. The downside, however, remains cushioned in the wake of the near-term bullish sentiment surrounding the US Dollar (USD) and ahead of the release of the crucial US monthly employment details.
The incoming US macro data provided evidence of a resilient labor market and suggested that the economy remained on a solid footing in the third quarter, which forced investors to further scale back their bets for a more aggressive easing by the Federal Reserve (Fed). This, in turn, assists the USD Index (DXY), which tracks the Greenback against a basket of currencies, to stand tall near a one-month peak touched on Thursday and turns out to be a key factor acting as a tailwind for the USD/CAD pair.
Furthermore, expectations for a bigger interest rate cut by the Bank of Canada (BoC) weigh on the Canadian Dollar (CAD) and offer additional support to spot prices. That said, escalating Middle East tensions keep Crude Oil prices elevated near a one-month top, which is seen underpinning the commodity-linked Loonie and capping the upside for the USD/CAD pair. Traders also prefer to move to the sidelines ahead of the official US jobs data, due later during the North American session.
The popularly known US Nonfarm Payrolls (NFP) report is expected to show that the economy added 140K jobs in September, slightly lower than the 142K in the previous month, and the Unemployment Rate held steady at 4.2%. Apart from this, Average Hourly Earnings will be looked upon for cues about the size of the Federal Reserve's (Fed) rate cut at its next policy meeting in November. This will drive the USD demand and determine the next leg of a directional move for the USD/CAD pair.
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.
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