USD/CAD rebounds toward 1.4050 as US shutdown resolution nears

USD/CAD advances as the US Dollar strengthens on optimism that the US government shutdown will soon end.
US President Donald Trump endorsed a bipartisan deal to end the US government shutdown.
The CAD may receive support from caution surrounding the BoC policy outlook.

Akhtar Faruqui FXStreet

USD/CAD gains ground after two days of losses, trading around 1.4030 during the Asian hours on Tuesday. The pair rises as the US Dollar (USD) gains support amid progress in the US Senate toward passing a deal to reopen the government.

US President Donald Trump, on Monday, backed a bipartisan deal to end the US government shutdown, signaling a likely reopening within days. Senate Majority Leader John Thune said he expects Trump to sign the bill once Congress passes it. The US Senate advanced a government funding bill to end the shutdown, moving it closer toward passage by voting 60-40 in the first approval on extending the enhanced Affordable Care Act subsidies.

On US monetary policy, Federal Reserve (Fed) Governor Stephen Miran told CNBC on Monday that inflation is easing and reaffirmed that staying on course with rate cuts is appropriate, suggesting a 50-basis-pointbps reduction in December, or at least 25 bps. Meanwhile, St. Louis Fed President Alberto Musalem noted that inflation remains closer to 3% than the 2% target, adding that policymakers now have sufficient information to guide their decisions.

However, the Canadian Dollar (CAD) may regain its ground against its peers as upbeat domestic labor market data have bolstered expectations that the Bank of Canada (BoC) may pause its easing cycle. Canada’s Unemployment Rate fell to 6.9% in October, from 7.1% prior, coming in below expectations. The Net Change in Employment increased by 66.6K individuals, against 60.4K prior, while the Participation Rate improved to 65.3%.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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