USD/CAD remains above 1.3950 near five-month highs
- USD/CAD appreciates as the US Dollar gains ground despite the ongoing US government shutdown.
- Senate Democrats are set to block a GOP-backed short-term funding bill again on Friday.
- The manufacturing slowdown increases the chances for further monetary easing by the Bank of Canada.
USD/CAD moves little after registering gains in the previous session, trading around 1.3960 during the Asian hours on Friday. The pair hovers around the five-month high of 1.3986, reached on Thursday, as the US Dollar (USD) advances, as traders largely shrug off concerns over the ongoing US government shutdown.
The immediate effect of a partial US government shutdown is likely to be a delay in key US macro releases, including the US September Nonfarm Payrolls (NFP) report. The US ISM Services PMI and the final S&P Global Services PMI reports are due later on Friday.
The shutdown is expected to continue until next week. Senate Democrats are poised to vote against a GOP-backed short-term funding bill again tomorrow, and the Senate is unlikely to meet this weekend.
The weakness in the US labor market boosts bets on further Federal Reserve (Fed) rate cuts. The CME FedWatch Tool suggests that markets are now pricing in a 97% chance of a Fed rate cut in October and a 91% possibility of another reduction in December.
S&P Global Manufacturing PMI fell to 47.7 in September, marking the eighth consecutive month of contraction and underscoring continued weakness in new orders and output. The slowdown strengthens expectations for further monetary easing by the Bank of Canada (BoC), following its September rate cut. Moreover, the Summary of Deliberations indicated policymakers remain open to additional reductions should downside risks persist.
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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