USD/CAD remains below 1.4000 amid dovish tone surrounding Fed decision
- USD/CAD struggles as traders expect the Fed to deliver a 25-basis-point rate cut on Wednesday.
- The commodity-linked Canadian dollar may face headwinds as OPEC+ could raise Oil production in December.
- The Bank of Canada is expected to deliver a rate cut on October 29.
USD/CAD extends its losses for the second consecutive day, trading around 1.3990 during the Asian hours on Tuesday. The pair depreciates as the US Dollar (USD) faces challenges due to the increased likelihood of a rate cut by the US Federal Reserve (Fed) on Wednesday.
The Fed is widely expected to lower interest rates by another 25 basis points, bringing the benchmark rate to 3.75-4.00%, at its October meeting. The CME FedWatch Tool indicates that markets are now pricing in nearly a 97% chance of a Fed rate cut in October and a 95% possibility of another reduction in December.
The US government shutdown has ignited debate among Federal Reserve officials, as policymakers weigh whether to cut rates soon to support a weakening labor market or maintain current levels amid inflation that remains persistently above the Fed’s 2% target.
The downside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) could face challenges amid weakening Oil prices. It is worth noting that Canada is the largest crude exporter to the United States (US).
West Texas Intermediate (WTI Oil price extends its losing streak for the third successive session, trading around $61.10 per barrel at the time of writing. Crude Oil prices decline as the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are expected to increase Oil output once again for December.
The CAD may also come under pressure as markets have nearly fully priced in a 25-basis-point rate cut by the Bank of Canada (BoC) on Wednesday. Adding to the downside, US President Donald Trump announced on Saturday a 10% increase in tariffs on Canadian goods “above what they’re paying now,” in response to an advertisement from Ontario that aired during the World Series broadcast. The move is expected to weigh on business investment and export revenues, dampening growth and potentially prompting the BoC to consider additional easing to counter these effects.
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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