- USD/CAD is holding steady around 1.3500 in early Asian session on Friday.
- The US ISM Services PMI came in stronger than expected, while private sector payrolls grew by the smallest gain since 2021 in August.
- US and Canadian employment reports will be the highlights on Friday.
The USD/CAD pair is trading flat near 1.3500 during the early Asian session on Friday. The US Dollar Index (DXY) is extending its decline to near the psychological support level of 101.00. Traders prefer to wait on the sidelines ahead of Friday’s key events. US and Canadian employment reports will be in focus later in the day.
Data released by Automatic Data Processing (ADP) on Thursday showed that private sector employment rose by 99,000 in August and annual wages rose 4.8% year-on-year. This followed the increase of 111,000 (revised from 122,000) seen in July and was well below the estimate of 145,000.
Meanwhile, US initial jobless claims rose to 227,000, compared with the previous reading of 232,000 (revised from 231,000) and below the initial consensus of 231,000. On the positive side, the US ISM Services PMI rose to 51.5 in August from 51.4 in July, above the market expectation of 51.1.
A rise in the US unemployment rate in July sparked fears of an impending US recession and triggered expectations of a larger rate cut by the Federal Reserve (Fed). Employment data will be released on Friday, including Non-Farm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings. These reports could significantly influence the size and pace of the Fed’s easing cycle. Any signs of a weaker US labor market could put some selling pressure on the Dollar in the near term.
On the other hand, speculation that the Bank of Canada (BoC) will cut additional interest rates this year could undermine the Loonie and limit the downside of the USD/CAD. The BoC cut its benchmark interest rate for the third consecutive time on Wednesday. BoC Governor Tiff Macklem said “If inflation continues to decline in line with our July forecast, it is reasonable to expect further cuts to our policy rate.” Looking ahead, Canadian employment data will also be in focus on Friday.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. 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) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures 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 confidence surveys can 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 can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
