USD/CAD drifts lower to near 1.3950 as Fed rate cut bets grow
- USD/CAD softens around 1.3960 in Friday’s early European session.
- Traders expect the Fed to cut interest rates two more times this year.
- Lower crude oil prices might weigh on the commodity-linked Loonie and cap the downside for the pair.
The USD/CAD pair loses ground near 1.3960, snapping the three-day winning streak during the early European session on Friday. The uncertainty surrounding the US government shutdown weighs on the US Dollar (USD) against the Canadian Dollar (CAD). The US September Nonfarm Payrolls (NFP) report will not be released in light of the ongoing federal shutdown.
The US government remains shut down after Congress failed to reach a funding deal. Republicans and Democrats are at odds over enhanced Obamacare subsidies, which drag the Greenback lower. The shutdown is likely to extend into next week.
Additionally, the weaker ADP National Employment report boosts expectations that the Federal Reserve (Fed) will cut interest rates two more times this year, undermining the USD. US private sector payrolls declined 32,000 in September, following the 3,000 decrease (revised from a 54,000 increase) reported in August and came in below the market consensus of 50,000.
On the other hand, a fall in crude oil prices might exert some selling pressure on the commodity-linked Loonie and create a tailwind for the pair. Traders are concerned about oversupply in the market ahead of a meeting of the Organization of the Petroleum Exporting Countries and allies (OPEC+) over the weekend. 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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