USD/CAD rebounds above 1.3950 despite upbeat Canadian GDP data
- USD/CAD posts modest gains near 1.3980 in Monday’s Asian session.
- Hassett’s nomination would be bearish for the US Dollar as he is seen as a dovish candidate.
- Canadian GDP surpassed forecasts, expanding at an annualized pace of 2.6% in Q3.
The USD/CAD pair recovers some lost ground to around 1.3980 during the Asian trading hours on Monday. The potential upside might be limited amid rising bets of a US Federal Reserve (Fed) rate cut this month. Traders brace for the US November ISM Manufacturing Purchasing Managers Index (PMI) report later on Monday for fresh impetus.
Investors ramp up expectations of a US rate cut in the December policy meeting following dovish remarks from Fed officials and a slew of weaker-than-expected US economic data. This, in turn, could weigh on the US Dollar (USD) against the Canadian Dollar (CAD) in the near term. Traders are now pricing in an 87% odds the Fed will cut by 25 basis points (bps) when it meets next week, according to the CME FedWatch tool.
Additionally, a report that White House economic adviser Kevin Hassett has emerged as the frontrunner to be the next Fed chair might contribute to the Greenback’s downside. Hassett is seen as a close ally who supports US President Donald Trump's call for quicker and deeper interest rate reduction to stimulate the economy.
On the Loonie front, stronger-than-expected Canadian quarterly Gross Domestic Product (GDP) data prompted traders to reduce bets of additional easing from the Bank of Canada (BoC) in the current rate-cutting campaign, supporting the CAD. Canada's economy grew at an annualized pace of 2.6% in the third quarter (Q3), compared to a contraction of 1.8% (revised from -1.6%) in Q2, Statistics Canada showed on Friday. This reading came in better than the estimation of a growth of 0.5%.
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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