USD/CAD softens to near 1.4100 ahead of BoC’s Macklem speech
- USD/CAD loses ground to around 1.4100 in Thursday’s early European session.
- US private payrolls rose by 42K in October, more than expected.
- Traders await the Canadian October Ivey PMI data and BoC’s Governor Macklem speech later on Thursday.
The USD/CAD pair declines to near 1.4100, snapping the five-day winning streak during the early European session on Thursday. A recovery in crude oil prices underpins the commodity-linked Canadian Dollar (CAD) against the Greenback. The Canadian October Ivey Purchasing Managers Index (PMI) report is due later on Thursday. Also, the Bank of Canada (BoC) Governor, Tiff Macklem, is scheduled to speak.
Stronger-than-expected US private payroll data might help limit the US Dollar’s (USD) losses. The Automatic Data Processing (ADP) revealed on Wednesday that private sector employment in the US climbed by 42K in October, compared to the 29K decrease (revised from -32K) recorded in the previous month. This figure came in above the market consensus of 25K.
Last week, Fed Chair Jerome Powell said a rate cut in December was not guaranteed in remarks after the US central bank’s latest policy easing. Traders have priced in about a 70% probability of a Fed rate cut in December, down from 93% a week ago, according to the CME FedWatch tool.
Meanwhile, the rebound in crude oil prices could support the commodity-linked Loonie and act as a headwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
The Bank of Canada (BoC) cut its benchmark rate by 25 basis points (bps) to 2.25% last week, but Governor Tiff Macklem said he would be ready to respond if Canada's economic outlook changed materially. This decision was the second cut in a row, bringing the rate down to the lowest since July 2022.
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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