USD/CAD hovers near 1.4100 as Fed rate cut bets increase, Oil prices weaken
- USD/CAD may lose ground amid rising Fed rate cut odds in December.
- Fed Governor Waller said his main concern is a weakening labour market, noting inflation is “not a big problem.”
- The commodity-linked CAD faces downward pressure amid declining Oil prices.
USD/CAD steadies after registering gains in the previous session, trading around 1.4110 during the Asian hours on Tuesday. The pair may depreciate as the US Dollar (USD) retreats as growing expectations of a Federal Reserve (Fed) rate cut in December intensify, driven by recent dovish remarks from Fed policymakers.
The CME FedWatch Tool suggests that markets are now pricing in an 81% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, up from 71% probability that markets priced a day ago.
Fed Governor Christopher Waller told Fox Business on Monday that his primary concern is the weakening labour market, stating that inflation is “not a big problem” in light of recent softness in employment. Waller also suggested that the September payrolls figure is likely to be revised lower and cautioned that concentrated hiring is “not a good sign,” signalling his support for a near-term rate cut.
Fed Waller’s remarks reinforced comments made on Friday by New York Fed President John Williams, which also contributed to shifting expectations toward earlier rate cuts. Williams indicated that interest rates could be lowered in the near term, ahead of key US retail sales and producer price data scheduled for release this week.
The downside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) receives downward pressure from the lower Oil prices. West Texas Intermediate (WTI) Oil price trades around $58.70 at the time of writing. Crude Oil prices lose ground as the United States (US) pushes for a peace plan between Ukraine and Russia to end the three-year war. The American Petroleum Institute (API) weekly crude Oil stock report will be eyed later on Tuesday.
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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