Canadian Dollar remains steady as hawkish Fed bets keep US Dollar stable
- USD/CAD may rise as hotter US inflation data and hawkish Fed commentary boost December Fed rate hike bets.
- Falling crude oil prices, fueled by surging OPEC+ output and easing US-Iran tensions, weigh on the Canadian Dollar.
- Rising Canadian inflation at 3.1% boosts Bank of Canada rate hike bets, softening downside pressure on the CAD.
USD/CAD holds steady around 1.4250 during Thursday's Asian trading session after posting two consecutive days of gains. Despite the pause, the pair could resume its upward climb as the US Dollar (USD) may draw strength from an increasingly hawkish Federal Reserve (Fed) policy outlook.
Following hotter-than-expected US Consumer Price Index (CPI) inflation data, traders have ramped up bets on a December rate hike, especially after Fed Governor Christopher Waller noted earlier this week that he would back a quarter-point increase, or even a half-point move if inflation worsens. According to the CME FedWatch Tool, markets are now pricing in around an 87% probability of a December rate hike, alongside a nearly 13% chance of a larger 50 basis point increase.
According to TD Securities, the US Dollar still has scope to advance against select majors, with analysts highlighting that “across global major currencies, we see room for the USD to rally selectively against CAD and KRW in the near-term.” They argue that “diverging employment data releases will likely keep USDCAD supported above 1.40,” as Canada’s “rising unemployment rate amid falling wage growth rate” undermines the case for tighter policy. In their view, this backdrop “reduces the market pricing of a December BoC rate hike relative to the Fed,” leaving the Canadian Dollar vulnerable while USDCAD remains underpinned at elevated levels.
Moreover, the USD/CAD pair may further appreciate as the commodity-linked Canadian Dollar (CAD) faces headwinds from falling crude oil prices. Oil has pulled back as the US and Iran appear to be avoiding further escalation, while supply has simultaneously expanded.
According to OPEC’s monthly report released on Wednesday, OPEC+ crude production surged by roughly 2.04 million barrels per day in October to reach 41.23 million barrels per day, driven largely by higher output from Saudi Arabia.
On the domestic front, the CAD is finding some underlying support as traders also price in a potential Bank of Canada (BoC) rate hike. Annual inflation in Canada edged up to 3.1% in September from 3.0% in August, marking its highest reading since May's 3.2%. Meanwhile, the Democratic Party's victory in the US mid-term elections may help ease trade pressures on Canadian economic growth.
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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