The USD/CAD pair is trading in a narrow range around 1.3950 during the Asian trading session on Friday. The Canadian pair fluctuates within a trading range on Thursday as investors await Canadian labor market data for November, which will be published at 13:30 GMT.
Investors will be paying close attention to Canadian employment data for signals on whether the Bank of Canada (BoC) will extend its monetary easing campaign.
Canada’s employment report is expected to show no new hirings and layoffs, after 66.6K jobs were created in October. The unemployment rate is expected to rise to 7% compared to the previous version, which reached 6.9%.
Signs of weak Canadian labor market conditions could prompt the need for a rate cut by the Bank of Canada at its monetary policy meeting on Wednesday.
Meanwhile, the US dollar is trading cautiously amid strong expectations that the Federal Reserve will cut interest rates at next week’s monetary policy meeting. At press time, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is seeking to hold a five-week low around 98.75 hit on Thursday.
According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 25 basis points to 3.50%-3.75% at its December policy meeting is 87%.
The Fed’s strong dovish outlook is supported by deteriorating US labor market conditions and expectations that tariff-driven inflation promoted by President Donald Trump is not persistent in nature.
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.
