USD/CAD remains above 1.4100 near six-month highs despite Fed rate cut odds
- USD/CAD maintains its position close to a six-month high of 1.4140, reached on Wednesday.
- The US Dollar lost ground after the Challenger Job Cuts report increased Fed rate cut bets.
- Canada’s seasonally adjusted PMI slipped to 52.4, its sixth straight month remaining above the 50-point mark.
USD/CAD continues its winning streak that began on October 30, trading around 1.4120 during the Asian hours on Friday. The pair remains near the six-month high of 1.4140, reached on November 5, as the US Dollar (USD) rebounds after posting losses in the previous session.
Traders will likely observe the preliminary Michigan Consumer Sentiment Index data later in the day, while the US government shutdown is restricting official data releases like Nonfarm Payrolls (NFP) and Unemployment Rate. Canada’s Net Change in Employment and Unemployment Rate will also be eyed.
The upside of the USD/CAD pair could be restrained as the US Dollar faced challenges, as the Challenger Job Cuts report prompted the Federal Reserve (Fed) to lower interest rates at its December meeting. Challenger, Grey & Christmas on Thursday, announced that companies cut over 153,000 jobs in October, marking the biggest reduction for the month in more than 20 years.
The Greenback could depreciate further as the US government shutdown extends further, hitting a record with still no solution in sight. The Senate is not currently set to vote on a House-passed measure to reopen the government on Thursday, after it failed to advance for the 14th time on Tuesday.
Canada’s Ivey Purchasing Managers Index (PMI) declined to 51.7 in October, from 61.6 in September. Meanwhile, the seasonally-adjusted PMI fell to 52.4 from 59.8 prior, missing expectations of 55.2. The reading marks the sixth consecutive month above the 50-point threshold, signaling continued expansion in overall activity.
Bank of Canada (BoC) Governor Tiff Macklem told the House of Commons Standing Committee on Finance on Wednesday that federal budget measures aimed at improving Canada’s productivity could deliver results if implemented effectively. “These things are pointing in the right direction, but it’s going to come down to execution,” he said. The budget, presented to Parliament on Tuesday, allocates billions of dollars for infrastructure, productivity, defense, and housing investments.
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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