USD/CAD flat lines near 1.4000 on hopes over US shutdown deal, Fed rate cut bets
- USD/CAD holds steady around 1.4010 in Wednesday’s early European session.
- The US government shutdown nears an end as a funding bill moves to the House after the Senate approved it.
- The Bank of Canada cut the rates to 2.25% in its October meeting and signaled that the easing cycle may be over.
The USD/CAD pair trades on a flat note near 1.4010 during the early European session on Wednesday. Private-sector US jobs data stoked worries about labour market weakness, which could weigh on the US Dollar (USD) against the Canadian Dollar (CAD) in the near term. The Bank of Canada (BoC) Summary of Deliberations will be published later on Wednesday.
Private employers shed an average of 11,250 jobs per week on average in the four weeks ended October 25, the Automatic Data Processing (ADP) showed on Tuesday. The report suggested the labor market slowed in the second half of October, compared with earlier in the month.
The US Senate approved a compromise on Monday that would end the longest government shutdown in US history. The funding bill is headed to the House for a final vote as soon as Wednesday. If it passes in both chambers of Congress, it will head to US President Donald Trump to be signed into law.
Traders brace for an imminent US government reopening that is expected to unleash a backlog of economic releases. Nonetheless, analysts believe that resumption of economic data will point to a slowing economy and that would prompt the Federal Reserve (Fed) to cut the interest rates next month. This, in turn, could undermine the USD against the CAD.
The BoC decided to cut its policy rate to 2.25% in the October meeting, marking the second consecutive 25 basis points (bps) reduction. BoC Governor Tiff Macklem signalled that further rate cuts are unlikely for now, citing that the economy follows its projected path.
The BoC survey of market participants suggested that many expect the rate to hold at 2.25% until at least mid-2027. However, other economists are divided, with some anticipating another reduction early in 2026, depending on how trade issues evolve.
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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