The USD/CAD pair settled near 1.4060 during the early European session on Thursday. Traders are bracing for upcoming US non-farm payrolls data to provide clues about a possible interest rate cut next month. Meanwhile, lower crude oil prices may weigh on the commodity-linked Canadian dollar against the US dollar.
The U.S. Bureau of Labor Statistics (BLS) will release its September employment report on Thursday, which was delayed due to the 43-day government shutdown. Economists expect 50,000 jobs to be added to the US economy in September, while the unemployment rate is expected to remain unchanged at 4.3%.
A weaker-than-expected jobs report could signal an economic slowdown, prompting the Federal Reserve to cut interest rates. This, in turn, could undermine the dollar in the near term. The CME FedWatch tool indicates that financial markets now estimate a 33% probability that the US central bank will cut its benchmark overnight borrowing rate by 25 basis points at its December meeting, down from the 63% probability that markets had priced in a week ago.
Meanwhile, crude oil prices fell after a report on a US proposal to end Russia’s war in Ukraine, which could weigh on the commodity-linked Canadian dollar and act as a tailwind for the pair. It is worth noting that Canada is the largest exporter of oil to the United States, and lower crude oil prices tend to negatively impact the value of the Canadian dollar.
Frequently asked questions about the Canadian dollar
The main factors that move 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 moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive.
The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment and consumer surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.
