USD/CAD holds above 1.4050 as Fed rate cut bets fade, Oil weakens
- USD/CAD remains stable after recovering its daily losses as Fed rate cut bets recede.
- Traders await the US September Nonfarm Payrolls for fresh guidance on the Fed’s policy outlook.
- The commodity-linked CAD may decline as the WTI price could further fall amid easing geopolitical risks.
USD/CAD remains stable after registering more than 0.5% gains in the previous session, hovering around 1.4060 during the Asian hours on Thursday. The pair may further appreciate as the US Dollar (USD) gains ground amid diminishing expectations for another Federal Reserve (Fed) rate cut in December following the latest Federal Open Market Committee (FOMC) Meeting Minutes. Traders await the release of the US September Nonfarm Payrolls (NFP) later on Thursday to gain fresh impetus on Fed policy outlook.
FOMC Minutes for the October 28-29 meeting indicated that Fed officials are divided and cautious about the path forward for interest rates. Most participants indicated further rate cuts would likely be appropriate over time, but several indicated they did not necessarily view a reduction in December as appropriate.
The CME FedWatch Tool suggests that financial markets are now pricing in a 33% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, down from 63% probability that markets priced a week ago.
The USD/CAD pair could gain ground as the commodity-linked Canadian Dollar (CAD) may struggle on subdued Oil prices. West Texas Intermediate (WTI) holds ground near $59.40 per barrel at the time of writing, following a 2.31% loss in the previous session. It is worth noting that Canada is the largest crude exporter to the United States (US).
Oil prices could further fall as easing geopolitical risks reduce expectations of supply disruptions from Russia-related sanctions. Reports that Washington is urging Ukrainian President Zelenskiy to consider a US-crafted peace plan have raised hopes for renewed diplomacy, which could lead to increased Russian Oil shipments and add to oversupply concerns.
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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