Canadian Dollar slips to six-month low as USD/CAD climbs past 1.4000
- USD/CAD climbs above 1.4000 to its highest level since April 10 as the US Dollar strengthens.
- Political turmoil in France and Japan drives flows into the Greenback.
- Traders await Canadian employment data on Friday for near-term direction.
The Canadian Dollar (CAD) extends its decline against the US Dollar (USD) on Thursday, with USD/CAD climbing above the 1.4000 psychological mark to reach its highest level since April 10. At the time of writing, the pair is trading around 1.4019 during the American session, up nearly 0.45% on the day, as the Greenback retains a firm bid across the FX board.
The decline in the Loonie comes amid renewed demand for the Greenback following political upheaval in France and Japan, which has prompted traders to rotate out of the Euro (EUR) and the Japanese Yen (JPY).
The USD’s advance, however, appears driven more by portfolio flows than fundamental strength, as the broader outlook for the Greenback remains tilted to the downside amid the prolonged United States (US) government shutdown and growing expectations that the Federal Reserve (Fed) will cut rates twice more this year to cushion labor market weakness despite lingering inflation pressures.
Meanwhile, weaker Crude Oil prices are adding to downward pressure on the Loonie, with West Texas Intermediate (WTI) crude hovering near $61.50 per barrel, down over 0.50% on the day. As Canada’s top export, falling Crude prices often translate into softer demand for the CAD.
On the monetary policy front, markets widely expect the Bank of Canada (BoC) to cut its policy rate by another 25 basis points at its upcoming meeting on October 29, after lowering it to 2.50% last month to counter slowing growth, easing inflation pressures, and weakening labor market conditions.
Economists expect the BoC’s benchmark rate to reach 2.25% by year-end, with officials keeping policy flexible and open to further cuts if growth and employment data continue to soften.
Looking ahead, Friday’s Canadian labor market data will be closely watched for near-term direction. The Unemployment Rate is expected to tick higher to 7.2% in September from 7.1%, with a modest Net Employment gain of 5,000 following August’s sharp 65,500 decline. A weaker-than-expected report could reinforce expectations of further BoC easing later this month, while an upside surprise may provide brief support for the Loonie.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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