USD/CAD crawls above 1.4000 favoured by a hawkish Fed, risk-off markets
- The US Dollar extends gains against the CAD and reaches session highs above 1.4000.
- Dwindling bets of a Fed cut in December and risk aversion are buoying the US Dollar on Friday.
- A 2% weekly decline in Oil prices is acting as a headwind for the loonie.
The US Dollar trades higher against its Canadian counterpart for the second consecutive day on Friday, returning to levels right above the 1.4000 psychological level to retrace losses from previous days, and trading practically flat on the weekly chart. The Hawkish comments by Federal Reserve (Fed) Chairman Jerome Powell and a. moderate risk aversion are buoying the Greenback against most of its main peers.
The US Dollar bounced from weekly lows at the 1.3890 area following the Fed's monetary policy decision on Wednesday. The bank met expectations and trimmed its Federal Funds rate to a three-year low in the 3.75%-4% range, but Chairman Powell rattled markets, affirming that a December rate cut is far from a done deal, which sent US Treasury yields and the US Dollar higher.
Furthermore, the framework agreement between US President Trump and the Chinese Premier Xi Jinping has allowed to extension of the trade truce between the US and China. Trump has pledged to reduce tariffs on Chinese imports in exchange for keeping rare earth trade flowing and resuming purchases of US soybeans, which has provided additional support to the US Dollar.
Also on Wednesday, the Bank of Canada trimmed its benchmark interest rates by 25 basis points, to 2.25% and hinted at the end of the easing cycle, although Goverm¡nor Macklem kept all options open, assuring that the central bank will be ready to respond if Canada's economic Outlook changed materially.
The Canadian Dollar bounced up following the BoC's monetary policy decision, but has been losing ground over the last two days, weighed by a firmer US Dollar amid a moderate risk-off mood and falling Oil prices, Canada's main export. The price of the West Texas Intermediate (WTI) barrel have dropped nearly 2% this week, to levels right above $60.00 at the time of writing, from last week's highs near $62.50.
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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