Canadian Dollar loses ground ahead of FOMC Minutes
- USD/CAD gains ground to near 1.4220 in Wednesday’s early European session.
- Softer US employment data pare bets of an imminent Fed rate hike.
- The Fed Minutes will be the highlight later on Wednesday.
The USD/CAD pair gathers strength to around 1.4220 during the early European trading hours on Wednesday. All eyes will be on the Minutes of the Federal Open Market Committee (FOMC) later in the day for signals on a potential rate hike.
Traders lower their bets on the Federal Reserve (Fed) rate hike at its October policy meeting following the soft US jobs data. However, markets are still expecting more increases later in the year and next year.
The US Nonfarm Payrolls (NFP) rose by 29K in September, versus a rise of 133K prior, below the market consensus of 90K, according to the US Bureau of Labor Statistics (BLS) on Friday. Meanwhile, the Unemployment Rate climbed to 4.2% in September from 4.1% in August.
Kansas City Fed President Jeff Schmid said on Tuesday that the central bank still needs to raise its policy rate further to tame inflation, even if higher long-term yields are weighing on activity in some parts of the US economy.
The odds of a rate hike of at least 25 basis points (bps) in October stand at 21.6%, from about 51% a week ago, according to the CME FedWatch tool. Markets are pricing in an 86.2% probability of a rate increase at the December meeting.
"With little forward guidance from Chair (Kevin) Warsh, markets have reacted sharply to each US data release and policymaker speech," said Commonwealth Bank of Australia currency strategist Samara Hammoud. "We expect the Fed to wait until December before hiking again,” Hammoud added.
Crude oil prices rose on Wednesday as the market weighed supply constraints from a storm heading for US oil-producing regions and attacks by Yemen's Iran-backed Houthis on Saudi Arabia against increased supplies of Middle East crude. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
Canada’s political fault lines widen as separatist momentum builds
Analysts at Rabobank highlight rising political fragmentation in Canada, noting that “the separatist Parti Québécois won around 30 percent of the vote in Monday’s provincial election, gaining 59 of 127 seats—just shy of a majority but enough to form a minority government.” They add that tensions are not confined to Quebec, with Alberta “to vote on its own independence (or at least, the process to start considering independence) from Canada on October 19,” underscoring a broader increase in domestic political uncertainty.
Fed’s Schmid flags AI-driven price pressures, keeps hawkish bias alive
Fed’s Schmid delivers a slightly more hawkish tone relative to the historical average, with an 8/10 FXS Speechtracker score versus a 7.5/10 baseline, underscoring persistent concern about inflation. The emphasis that the labor force “remains in a good place” alongside the assertion that “AI is now one of the largest drivers of inflation” and that the Fed’s credibility is at stake signals a willingness to lean on the short end of the curve despite already elevated long-term yields. Overall, the message that “we still have a way to go in beating inflation” reinforces a bias toward keeping policy restrictive for longer, supporting the Dollar on balance.
The FXS Fed Sentiment Index rose by 0.34 points to 137.91, confirming that the latest remarks push the aggregate Fed tone further into hawkish territory. With the index well above the neutral 100 mark and the FXS Speechtracker score elevated, markets are likely to interpret Schmid’s comments as supportive of higher-for-longer short rates, a backdrop that typically underpins the Dollar against lower-yielding peers.
Technical Analysis: USD/CAD keeps a bullish vibe in the near term
In the daily chart, USD/CAD maintains a bullish near-term bias as spot holds above both the 100-day simple moving average (SMA) and the Bollinger Bands’ 20-day middle band. Price is pressing into the upper half of the recent range, with the upper Bollinger band acting as the next topside cap, while the Relative Strength Index (14) near 69.5 flirts with overbought territory, hinting that upside momentum is strong but increasingly stretched.
On the downside, initial support emerges at the Bollinger middle band around 1.4085, ahead of a deeper structural floor at the 100-day SMA near 1.4005, with the lower Bollinger band down at 1.3820 reinforcing the broader bullish structure. On the topside, the only nearby resistance is defined by the upper Bollinger band at 1.4355, and a clear break above this barrier would open the door for an extension of the uptrend while a failure there could trigger a corrective pullback towards the cited supports.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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