USD/CAD dips below 1.4000 as the US Dollar retreats amid the risk-on mood
- The US Dollar dips below 1.4000 against the CAD on risk-on markets.
- The reopening of the US government has boosted risk appetite.
- The BoC has adopted a more cautious tone towards monetary policy.
The US Dollar is extending its reversal against its Canadian counterpart for the sixth consecutive day on Thursday. The end of the US government shutdown has triggered a moderate enthusiasm that is weighing the US Dollar across the board, and pushing the USD/CAD to 10-day lows below the 1.4000 line.
Markets are celebrating that US President Trump finally signed the bill that will allow for the reopening of the federal government, and the release of a backlog of delayed macroeconomic figures. The data on the releases, however, remains unclear, and the White House stated that some figures, such as October’s jobs and consumer inflation data, may never be published.
Fed speakers continued showing their wide divergences on monetary policy on Wednesday, but investors have dialled down hopes of a Fed rate cut in December. Futures markets are pricing a 54% chance of a quarter-point cut, down from 67% last week and above 90% one month ago.
Fed Governor Stephen Miran reiterated the need to ease monetary policy further to avoid further labour market deterioration. Atlanta Fed President Raphael Bostic, on the contrary, showed further concern about the upside risks of inflation and warned against cutting rates too fast.
In Canada, the upbeat employment data released last week and the Bank of Canada’s more cautious tone towards monetary policy have forced investors to reassess their bets of further BoC easing in the near term. This is contributing to strengthening the Loonie.
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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