USD/CAD extends rally to near 1.3850 due to rising rate cut bets by Fed, BoC
- USD/CAD gains ground as the US Dollar recovers its recent losses from the previous session.
- CME FedWatch tool indicates a pricing of 92% of a 25-basis-point Fed rate cut in September, following the August jobs data.
- The Canadian Dollar came under pressure as disappointing jobs data fueled expectations of Bank of Canada policy easing.
USD/CAD continues its winning streak for the sixth consecutive session, trading around 1.3840 during the Asian hours on Monday. However, the upside of the pair could be restrained as the US Dollar (USD) could face challenges amid rising United States (US) Federal Reserve (Fed) rate cut bets, following weaker-than-expected jobs data for August.
The US Bureau of Labor Statistics (BLS) reported on Friday that the US Nonfarm Payrolls (NFP) climbed by 22,000 in August, falling short of the market expectations of 75,000. This figure followed the 79,000 increase (revised from 73,000) recorded in July. Meanwhile, the Unemployment Rate increased to 4.3% August, as expected, against the 4.2% prior.
The CME FedWatch tool indicates a pricing in 92% of a 25-basis-point (bps) rate cut by the Fed at the September policy meeting, up from 86% a week ago, with bets rising on a potential 50 bps reduction this month.
The USD/CAD pair gained support as the Canadian Dollar (CAD) faced challenges after disappointing jobs data bolstered hopes for Bank of Canada (BoC) policy easing. Net Change in Employment showed an unexpected loss of about 65.5K positions in August, against the expected 7.5K new jobs. The Canadian employment continued to decline after July’s losses of 40.8K jobs. Meanwhile, the Unemployment Rate jumped to 7.1% from 6.9% prior, surpassing the expected 7.0%.
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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