USD/CAD posts modest gains above 1.4000 on lower crude oil prices
- USD/CAD trades with mild gains around 1.4030 in Friday’s Asian session.
- Several Fed officials support a December rate cut.
- Lower crude oil prices could weigh on the commodity-linked CAD.
The USD/CAD pair posts modest gains near 1.4030 during the Asian trading hours on Friday. The potential upside for the Greenback might be limited as traders ramped up bets for further monetary easing from the US Federal Reserve (Fed) next month. Traders brace for the release of Canada’s Gross Domestic Product (GDP) for the third quarter (Q3), which is due later on Friday.
Dovish remarks from Fed officials have bolstered expectations for a rate reduction. San Francisco Fed President Mary Daly said earlier this week that she supports a December interest rate cut, citing labor market weakness. Fed Governor Christopher Waller noted that the job market is weak enough to warrant another quarter-point rate cut in December, though the decision depends on an upcoming flood of data delayed by the US government shutdown.
US Fed funds futures are pricing an implied 87% chance of a 25 basis points (bps) rate cut at the Federal Reserve's (Fed) December policy meeting, compared to a 39% odds a week earlier, according to the CME FedWatch tool.
On the other hand, crude oil prices fall amid renewed optimism surrounding a potential ceasefire between Ukraine and Russia. This, in turn, could weigh on the commodity-linked Loonie and act as a tailwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
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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