USD/CAD rises above 1.3750 after rebounding from three-month lows
- USD/CAD rebounds after hitting a three-month low near 1.3730 on Tuesday.
- The US Dollar gains as mixed labor data failed to bolster expectations for further Federal Reserve rate cuts.
- The Canadian Dollar could find support as the BoC sees policy “about the right level,” curbing expectations for near-term easing.
USD/CAD rebounds from a three-month low of 1.3730, recorded in the previous session, currently trading around 1.3770 during the Asian hours on Wednesday. The pair gains ground as the US Dollar (USD) finds support, as mixed labor market data did little to reinforce expectations of additional Federal Reserve rate cuts.
The US November jobs report showed payroll growth of 64K, slightly above forecasts, but October figures were revised sharply lower, and the unemployment rate rose to 4.6%, the highest since 2021, underscoring a gradually cooling labor market. Retail sales were flat on the month, reinforcing signs that consumer demand is losing momentum.
Fed officials are split over whether more easing of monetary policy is needed next year. The median Fed official penciled in just one reduction in 2026, but some policymakers see no further cuts. Meanwhile, traders anticipate two rate cuts next year.
According to the Wall Street Journal, the US President Donald Trump is set to interview Fed Governor Christopher Waller on Wednesday for the top Fed job. A WSJ poll in October revealed that Waller was ranked as the top choice of economists, because “he has laid out some of the most intellectually consistent arguments for rate cuts this year and is seen as someone who might be able to navigate internal divisions.”
The USD/CAD pair could extend its decline as the Canadian Dollar finds support from the Bank of Canada’s decision to keep rates at 2.25% and its view that policy is “about the right level,” dampening expectations for aggressive near-term easing.
Meanwhile, Canadian inflation data, headline CPI steady at 2.2% and trimmed-mean inflation easing to a ten-month low of 2.8%, reinforced confidence that price pressures are converging toward the BoC’s target.
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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