USD/CAD approaches 1.3800 amid a broad-based USD rebound
USD/CAD trims some losses and reaches 1.3780 after bouncing from 1.3745 lows.
The US Dollar appreciates across the board despite soft US labour market figures.
BoC's Macklem says that interest rates are at the appropriate level now.
The US Dollar is trimming some losses against its Canadian counterpart on Wednesday and reaches levels right above 1.3780 during the European trading session, after bouncing from three-month lows at 1.3745.
The US Dollar Index, which measures the US Dollar against a basket of currencies, is trading moderately higher as investors digest a batch of delayed US labour market reports and reassess their expectations for near-term Federal Reserve interest rate cuts.
Nonfarm Payrolls data released on Tuesday revealed that net employment fell by 105K in October, before rising by a larger-than-expected 64K in November. The jobless rate, however, rose to a four-year high of 4.6% and wage growth eased to 3.5% year-on-year, from 3.7% in the previous month.
Further Fed easing hopes remain alive
These figures reflect a soft labour market and keep pressure on the Federal Reserve to ease its monetary policy further. A January rate cut is practically discarded, but the market is almost evenly split about March’s meeting ahead of Thursday’s key US Consumer Prices Index release.
In Canada, BoC Governor, Tiff Macklem, said that the current monetary policy is “appropriate” to keep inflation close to the 2% target, but signalled modest growth ahead, curbing hopes of any interest rate hike in the near-term.
On Monday, Canada’s Consumer Prices Index (CPI) showed that inflation remained steady at a 2.2% annual rate in November, against market expectations of an acceleration to 2.4%. The BoC’s core inflation contracted 0.1% on the month and grew at a 2.9% yearly rate, also unchanged from the previous month.
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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