The USD/CAD pair remains stable after recording gains of more than 0.5% in the previous session, hovering around 1.4060 during Asian hours on Thursday. The pair may rise further as the US dollar (USD) strengthens amid dwindling expectations for another interest rate cut by the Federal Reserve (Fed) in December following the minutes of the latest Federal Open Market Committee (FOMC) meeting. Traders await the US September Non-Farm Payrolls (NFP) report later Thursday to gain new momentum on the Fed’s policy outlook.
Minutes from the October 28-29 Federal Open Market Committee meeting indicated that Fed officials are divided and cautious about the future path of interest rates. Most respondents indicated that further rate cuts would likely be appropriate over time, but several indicated that they did not necessarily see a cut in December as appropriate.
CME’s FedWatch tool indicates that financial markets are now pricing in a 33% probability that the Fed 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.
USD/CAD could gain as the commodity-linked Canadian dollar may face difficulties due to lower oil prices. WTI remains stable near $59.40 per barrel at the time of writing, after a 2.31% loss in the previous session. It is worth noting that Canada is the largest exporter of crude oil to the United States.
Oil prices could fall further as mitigation of geopolitical risks reduces expectations of supply disruption due to Russia-related sanctions. Reports that Washington is urging Ukrainian President Zelensky to consider a US-drafted peace plan have raised hopes for renewed diplomacy, which could lead to increased shipments of Russian oil and raise concerns about oversupply.
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.
