- USD/CAD gains strength around 1.3620 in the early Asian session on Tuesday.
- The encouraging jobs data led traders to reduce bets on further sharp rate cuts from the Fed.
- Higher crude oil prices could limit the CAD’s decline.
The USD/CAD pair extends the rally to near 1.3620 during the early Asian session on Tuesday. Friday’s strong labor market data caused traders to sharply reduce bets on aggressive interest rate cuts from the Federal Reserve (Fed), boosting the US dollar (USD) overall.
US employment reports on Friday showed an increase in Non-Farm Payrolls (NFP) and a decline in the unemployment rate, prompting traders to reduce bets on further Fed rate cuts. Investors expect the US central bank to cut rates by just 25 basis points (bps) at the November meeting, instead of 50 bps. This, in turn, provides some support to the USD.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, stalled near the highest level since mid-August around 102.50. According to the CME FedWatch tool, markets are now pricing in around an 85% chance of 25 bps Fed rate cuts in November, up from 31.1% last week.
However, Minneapolis Fed President Neel Kashkari said on Monday that he supported the Fed’s decision to cut rates by 50 bps, adding that the balance of risks has shifted from “high inflation to perhaps higher inflation.” unemployment”. Traders will take further cues from speeches by the Fed’s Raphael Bostic, Phillip Jefferson and Susan Collins on Tuesday. Any dovish comments from Fed officials could drag the Dollar lower against the Canadian Dollar (CAD).
The pair’s upside could be limited as traders are concerned about oil supply disruption amid persistent geopolitical tensions in the Middle East. This could boost the commodity-linked CAD and act as a headwind for USD/CAD. Canada is the largest exporter of oil to the United States (US), and higher crude oil prices tend to have a positive impact on the value of the CAD.
The Canadian Dollar FAQs
The key factors that determine the price of 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 product, 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 are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the 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 usually 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 also rises, 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 happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.
The published macroeconomic data measures the health of the economy and may 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 may encourage the Bank of Canada to raise interest rates, resulting in a stronger currency. However, if 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.
