USD/CAD declines as soft ADP report reinforces dovish Fed outlook
- USD/CAD weakens as the US Dollar stays under sustained selling pressure.
- Weaker-than-expected ADP data amplify US labour market concerns and weigh further on the Greenback.
- Canada’s upcoming jobs report on Friday takes centre stage ahead of the December 10 BoC interest rate decision.
The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Wednesday as the Greenback remains under broad pressure amid a firmly dovish Federal Reserve (Fed) outlook. At the time of writing, USD/CAD is trading around 1.3950, edging close to one-month lows as bearish momentum builds.
Adding to the Dollar’s decline, the latest ADP National Employment Report underscored renewed weakness in the US labour market. Private-sector employment fell by 32,000 in November, sharply missing expectations for a 5,000 increase, while October’s figure was revised up to a 47,000 gain from 42,000 previously.
This dataset comes at a critical time for policymakers, with the November and October Nonfarm Payrolls (NFP) reports to be released together on December 16.
The soft labour print pushed the US Dollar Index (DXY) lower to around 98.96, near a one-month low and down roughly 0.40% on the day. Markets see the data as strengthening the case for the Fed to lower interest rates at next week’s meeting, in line with recent dovish-leaning remarks from several policymakers who have acknowledged slowing labour momentum.
Attention now turns to the ISM Services Purchasing Managers Index (PMI) due later in the day. Another soft print could reinforce expectations of near-term easing. According to the CME FedWatch Tool, markets currently price in about an 88% chance of a 25 basis point (bps) cut at the December 9-10 monetary policy meeting.
On the Canadian side, the domestic calendar remains light, though the latest Q3 Labour Productivity figures offered a mildly supportive signal for the Canadian Dollar. Productivity rose 0.9% QoQ, improving from the -1.0% contraction in the previous quarter and beating the 0.4% forecast. Attention now turns to Friday’s labour market release, which will be crucial ahead of the Bank of Canada’s (BoC) December 10 interest rate decision.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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