USD/CAD remains below 1.3800 amid rate cut bets
- USD/CAD struggles as softer November CPI boosts expectations of US Federal Reserve rate cuts.
- US President Trump said the next Federal Reserve chair will strongly favor much lower interest rates.
- Canada’s Retail Sales are expected to be flat at 0% MoM in October.
USD/CAD remains subdued for the second successive session, trading around 1.3780 during the Asian hours on Friday. The pair faces challenges as the US Dollar (USD) struggles amid rising expectations of US Federal Reserve (Fed) rate cuts following the unexpectedly cooled US Consumer Price Index (CPI) inflation in November. Traders will likely observe the University of Michigan Consumer Sentiment Index for December later in the day.
The US Bureau of Labor Statistics (BLS) released on Thursday that the US Consumer Price Index (CPI) eased to 2.7% in November. This reading came in below the market consensus of 3.1%. Meanwhile, the US core CPI, which excludes volatile food and energy prices, rose by 2.6%, missing the expectation of 3.0%. This figure marks the slowest pace since 2021.
US President Donald Trump said on Thursday that the next chairman of the Federal Reserve (Fed) will be someone who believes in lower interest rates "by a lot." Trump further noted that he will soon announce a successor to current Fed Chair Jerome Powell.
The Bank of Canada (BoC) kept interest rates unchanged at 2.25% last week and said the current policy setting is “about the right level,” citing inflation close to target and signs of resilience in economic activity. Traders will likely observe the upcoming Retail Sales data from Canada.
Canadian Dollar FAQs
The key factors driving 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 taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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