USD/CAD reaches fresh six-month highs near 1.4050 ahead of Fed Powell’s speech
- USD/CAD marked a new six-month high of 1.4043 on Tuesday.
- The US Dollar may struggle due to rising odds of further Fed rate cuts.
- The upbeat Canadian employment data have diminished expectations for another BoC rate cut in October.
USD/CAD gains ground for the second successive day, trading around a new six-month high of 1.4043 during the Asian hours on Tuesday. Traders will likely observe the US Federal Reserve (Fed) Chair Jerome Powell, who is scheduled to speak on Economic Outlook and Monetary Policy at the National Association for Business Economics (NABE) Annual Meeting in Philadelphia later in the day.
The upside of the USD/CAD pair could be restrained as the US Dollar (USD) could face challenges amid rising odds of further rate cuts by the Fed by year-end. The CME FedWatch Tool suggests that markets are now pricing in nearly a 97% chance of a Fed rate cut in October and a 92% possibility of another reduction in December.
Philadelphia Fed President Anna Paulson said on Monday that rising risks to the job market argue for more interest rate cuts by the US central bank, as trade tariffs now appear unlikely to push up inflation as much as expected.
Market anxiety deepened amid the ongoing US government shutdown, as the White House moved forward with widespread federal layoffs. The shutdown is expected to weigh on the US economy, with missed paychecks and the suspension of billions of dollars’ worth of government services likely to ripple beyond federal employees and impact the broader public.
The USD/CAD pair may lose ground as the Canadian Dollar (CAD) could receive support as the upbeat Canadian employment data reduced bets on another Bank of Canada (BoC) interest rate cut this month. Investors see roughly 50% odds the Canadian central bank cuts interest rates at its next policy decision on October 29, down from 72% chance before the data.
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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