USD/CAD maintains position near 1.4000 as expectations for further Fed rate cuts diminish
- USD/CAD remains steady amid decreasing odds of additional Fed rate cuts.
- Fed Chair Powell said that another rate cut in December is far from certain.
- The Canadian Dollar could gain support as the BoC indicated the end of its policy easing.
USD/CAD remains steady after registering gains in the previous session, trading around 1.3980 during the Asian hours on Friday. The pair appreciated as the US Dollar (USD) received support after Federal Reserve (Fed) Chair Jerome Powell's comments lowered expectations for further interest rate cuts.
The US Fed delivered a 25-basis-point rate cut on Wednesday, lowering its benchmark rate to a range of 3.75%–4.0% in a 10–2 vote. The decision was not unanimous, as Fed Governor Stephen Miran supported a larger 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid voted to keep rates unchanged.
Fed Chair Jerome Powell noted that the central bank is struggling to balance its dual mandate of controlling inflation and supporting employment due to limited data availability amid the ongoing US government shutdown. Powell cautioned that policymakers may have to adopt a wait-and-see approach until official data reporting resumes. He also added that another rate cut in December is far from certain, emphasizing that the outlook remains uncertain.
The USD/CAD pair could face headwinds as the Canadian Dollar (CAD) may receive support from signs that the Bank of Canada (BoC) may be ending its policy easing cycle. The BoC lowered its interest rate by 25 basis points, bringing its policy rate down to 2.25%. The central bank described this level as “about right if inflation and activity evolve as projected,” hinting that the latest cut may signal the end of its easing cycle.
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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