The USD/CAD pair remains weak for the second session in a row, trading around the 1.3780 level during Asian hours on Friday. The pair faces challenges as the US Dollar (USD) faces difficulties amid rising expectations of interest rate cuts by the US Federal Reserve (Fed) following unexpectedly cold inflation in the US Consumer Price Index (CPI) in November. Traders will likely be watching the University of Michigan Consumer Confidence Index for December later today.
The US Bureau of Labor Statistics (BLS) released on Thursday that the US Consumer Price Index (CPI) fell to 2.7% in November. This reading was lower than market expectations of 3.1%. Meanwhile, the US core CPI, which excludes volatile food and energy prices, rose 2.6%, missing expectations of 3.0%. This number represents the slowest pace since 2021.
US President Donald Trump said on Thursday that the next head of the Federal Reserve will be someone who believes in cutting interest rates “significantly.” Trump also indicated that he will soon announce a successor to current Fed Chairman Jerome Powell.
The Bank of Canada (BoC) kept interest rates unchanged at 2.25% last week and said the current policy stance is “about the right level,” citing inflation close to target and signs of resilience in economic activity. Traders will likely be monitoring retail sales data coming out of Canada.
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.
