- USD/CAD rises slightly to around 1.4310 in the early Asian session on Wednesday.
- The Fed will likely cut interest rates by 25 bps at the December meeting on Wednesday.
- Canadian Dollar weakens to near five-year low on political risks.
The USD/CAD pair trades with slight gains near 1.4310 during the early Asian session on Wednesday. The Canadian Dollar (CAD) fell to the lowest level since April 2020 amid political turmoil in Canada. Markets could turn cautious ahead of the US Federal Reserve’s (Fed) interest rate decision, which is expected to cut interest rates by 25 basis points (bps) on Wednesday at the end of its meeting. two days.
The Fed is widely expected to cut borrowing costs on Wednesday for the third straight meeting. Markets are now almost fully pricing in a quarter-percentage-point cut at the Fed’s December meeting, compared with about a 78% chance a week ago, according to the CME’s FedWatch tool. The Fed’s press conference and Summary Economic Projections (SEP), or dot plot, will be analyzed for clues about next year’s outlook.
Data released by the US Census Bureau on Tuesday showed that US retail sales rose 0.7% month-on-month in November, compared with the 0.5% increase (revised from 0.4%) seen in October. The reading was better than the market expected, which was an increase of 0.5%. However, the US retail sales data had no impact on expectations that the Fed would cut interest rates at its December meeting on Wednesday.
Elsewhere, the Loonie remains on the defensive after Canada’s Deputy Prime Minister Chrystia Freeland resigned on Monday in a surprise move, saying she disagreed with Prime Minister Justin Trudeau over the president-elect’s tariff threats. of the USA, Donald Trump. Canadian Prime Minister Justin Trudeau faced growing calls to resign as Freeland’s resignation marked the first open dissent against Prime Minister Trudeau from within his cabinet.
“We believe this level of political turbulence will increase levels of uncertainty for Canadian consumers and businesses, adding to the headwinds already facing productivity-enhancing investment,” said Karl Schamotta, chief market strategist at Corpay, in a note
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.
