USD/CAD ticks up near 1.3960 amid US-Canada trade talks
- USD/CAD edges up to near 1.3960, while investors await US-Canada trade talks.
- US government shutdown and firm Fed dovish bets are expected to be drags for the US Dollar bulls.
- Canadian employers are expected to have added 7.5K workers in September.
The USD/CAD pair edges higher to near 1.3960 during the European trading session on Tuesday. The Loonie pair ticks up as the US Dollar (USD) gains significantly amid increase in its safe-haven demand in times when the French economy is going through political crisis.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.4% higher to near 98.50.
Meanwhile, ongoing United States (US) government shutdown and firm Federal Reserve (Fed) dovish bets are expected to keep a lid over the US Dollar’s upside.
On Monday, Democrats didn’t support the short-term funding bill at the US Senate as Republicans refrain from rolling back cuts in healthcare benefits program announced earlier this year.
On the monetary policy front, traders seen an 80% chance that the Fed will cut interest rates by 25 basis points (bps) in each of its two policy meetings remaining this year.
Going forward, investors will pay close attention to the outcome of trade talks between Canadian Prime Minister (PM) Mark Carney and US President Donald Trump at the White House on Tuesday.
Domestically, investors await the Canadian employment data for September, which will be released on Friday. The labor market report is expected to show that economy added fresh 7.5K workers after laying-off 65.5K employees in August.
(This story was corrected on October 7 at 12:03 GMT to say, in the first bullet point, that USD/CAD edges up to near 1.3960, not USD/CHF.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
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