Canadian Dollar holds gains against subdued US Dollar as Fed pause expectations rise
- USD/CAD fell as the US Dollar weakened as markets increasingly expect the Federal Reserve to pause interest rate hikes.
- CME FedWatch Tool suggests that traders price in nearly an 84% chance the Fed keeps rates unchanged this month.
- Commodity-linked CAD could struggle as WTI falls amid US sanctions waivers on Russia to boost global oil supply.
USD/CAD inches higher after opening at a bearish gap, remaining in negative territory, trading around 1.4120 during Asian hours on Monday. The currency pair remains subdued as the US Dollar (USD) struggles under fading expectations for a Federal Reserve (Fed) rate hike in October. Market sentiment shifted after Fed Chairman Kevin Warsh spoke at an International Monetary Fund event on Friday, stating that he does not prejudge interest-rate decisions and offering no clear indication of whether the central bank will raise or hold short-term rates at its upcoming October 27–28 meeting.
Market expectations for a rate increase have dropped significantly. According to the CME FedWatch Tool, traders are now pricing in nearly an 83.9% probability that the Fed will keep interest rates unchanged later this month, a sharp rise from the 49% chance priced in just a month earlier.
The USD/CAD pair may appreciate as the commodity-linked Canadian Dollar (CAD) could face challenges amid lower oil prices. Crude oil prices slipped following US President Donald Trump’s decision to waive key sanctions and tariffs on Russia, a move expected to boost Russian fuel exports. The executive order signed on Friday paused restrictions under the Graham Act, a bill Trump had signed just last month under pressure from lawmakers seeking to punish Moscow over its war in Ukraine. Secretary of State Marco Rubio noted that the president will take up to 60 days to evaluate the economic impact of this waiver.
BoC watchers focus on inflation and business survey for signs of energy shock spillover
Economists at Royal Bank of Canada say Monday’s release of Canadian inflation data alongside the BoC’s Q3 Business Outlook Survey will be scrutinized for evidence that price pressures are becoming more entrenched. They note that markets will be watching “closely for signs on whether inflation pressures from persistently elevated energy prices are broadening and permeating across the economy,” a development that would complicate the policy outlook ahead of the Oct. 28 decision.
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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