The USD/CAD pair is recovering some of its losses to reach around 1.3980 during Asian trading hours on Monday. Potential upside may be limited amid growing bets on an interest rate cut by the US Federal Reserve this month. Traders are gearing up for the November ISM Manufacturing PMI report in the US later on Monday for fresh momentum.
Investors raised their expectations for a US interest rate cut at the December policy meeting following dovish comments from Federal Reserve officials and a slew of weaker-than-expected US economic data. This, in turn, may impact the US Dollar (USD) versus the Canadian Dollar (CAD) in the near term. Traders are now pricing in 87% odds that the Fed will cut rates by 25 basis points when it meets next week, according to the CME FedWatch tool.
In addition, the report that White House economic advisor Kevin Hassett has emerged as the front-runner to be the next Fed chair may contribute to the dollar’s decline. Hassett is seen as a close ally supporting US President Donald Trump’s call for faster and deeper interest rate cuts to stimulate the economy.
On the Canadian dollar front, stronger-than-expected Canadian quarterly GDP data prompted traders to reduce bets on additional easing from the Bank of Canada (BoC) in the current interest rate cutting campaign, supporting the Canadian dollar. Statistics Canada showed on Friday that Canada’s economy grew at an annual pace of 2.6% in the third quarter (Q3), compared with a contraction of 1.8% (revised from -1.6%) in the second quarter. This reading was better than growth estimates of 0.5%.
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.
