USD/CAD flat lines above 1.4050, all eyes on US NFP data
- USD/CAD trades on a flat note around 1.4060 in Friday’s early European session.
- The delayed US Nonfarm Payrolls (NFP) data will be in the spotlight later on Thursday.
- Lower crude oil prices could drag the Canadian Dollar lower.
The USD/CAD pair holds steady near 1.4060 during the early European session on Thursday. Traders brace for the upcoming US Nonfarm Payrolls (NFP) data to provide clues about the potential for an interest-rate cut next month. Meanwhile, lower crude oil prices could weigh on the commodity-linked Canadian Dollar (CAD) against the Greenback.
The US Bureau of Labor Statistics (BLS) will release the September employment report on Thursday, which was delayed by the 43-day government shutdown. Economists expect to see 50,000 jobs added in the US economy in September, while the Unemployment Rate is projected to stay unchanged at 4.3%.
A weaker-than-expected jobs report could signal an economic slowdown, prompting the Federal Reserve (Fed) to cut interest rates. This, in turn, could undermine the Greenback in the near term. The CME FedWatch tool suggests that financial markets are now pricing in a 33% possibility that the US central bank will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, down from the 63% chance that markets priced a week ago.
Meanwhile, crude oil prices edge lower after a report of a US proposal to end the Russian war in Ukraine, which could weigh on the commodity-linked Loonie and act as a tailwind for the pair. 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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