- USD/CAD drifts higher to around 1.4075 in Thursday’s early Asian session.
- Fed Chair Powell was upbeat about the US economy; US ISM Services came in weaker than expected in November.
- The BoC will likely cut a deeper-than-usual interest rate in its December meeting.
The USD/CAD pair edges higher to near 1.4075 during the early Asian session on Thursday. The rising bets of the Bank of Canada (BoC) rate cut and a decline in crude oil prices continue to undermine the commodity-linked Canadian Dollar (CAD). The Canadian November Ivey PMI and US weekly Initial Jobless Claims are due later on Thursday.
The Fed Chair Jerome Powell said on Wednesday that the US economy is in remarkably good shape, allowing Fed officials to potentially be more cautious in cutting interest rates further. Powell further stated that Unemployment is still very low and making progress on inflation. The cautious stance by the US central bank is likely to underpin the Greenback against the CAD in the near term.
Data released by the Institute for Supply Management (ISM) on Wednesday showed that the US Services PMI fell to 52.1 in November from 56.0 in October. This reading came in weaker than the expectation of 55.5. The USD weakened in an immediate reaction to the downbeat US Services PMI data.
On the other hand, the expectation that the Bank of Canada (BoC) would continue cutting rates more aggressively than the Fed might help limit the USD’s downside. Investors anticipate the Canadian central bank to continue its easing campaign at an interest rate decision next week, with the market pricing in nearly 50% odds of another large 50 basis points (bps) move.
Additionally, the lower crude oil prices could drag the commodity-linked Loonie lower. It's worth noting that Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative 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.
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