- USD/CAD maintains its position below the multi-year high of 1.4245 marked on Friday.
- The CME FedWatch tool suggests a full assessment of a quarter basis point cut by the Fed on Wednesday.
- The Canadian Dollar faced challenges as the BoC aggressively eased monetary policy.
USD/CAD declines after hitting a multi-year high of 1.4245 on Friday, trading around 1.4230 during Asian hours on Monday. This rise could be attributed to the subdued US Dollar (USD) amid tepid US Treasury yields ahead of the Federal Reserve (Fed) interest rate decision, with a higher probability of a 25-year rate cut. basis points in its last monetary policy meeting in 2024.
Market analysts predict the US central bank will cut rates as it prepares the market for a pause, given the robust US economy and inflation stuck above 2%. According to the CME FedWatch tool, markets are now almost fully pricing in a quarter basis point cut at the Fed’s December meeting.
The Canadian Dollar (CAD) faced challenges as the Bank of Canada (BoC) aggressively eased monetary policy. The BoC cut its interest rates by 50 basis points to 3.25% last week, as expected, but guided a more gradual easing approach as policy rates have fallen significantly. BoC Governor Tiff Macklem warned that US President-elect Donald Trump’s tariffs on its exports will have a significant impact on the economy.
The commodity-linked CAD may receive bullish support from crude oil prices due to the increasing likelihood of tighter supplies driven by the implementation of additional US sanctions on major producers Russia and Iran. The price of West Texas Intermediate (WTI) oil is trading around $70.50 per barrel at the time of writing.
On Friday, US Treasury Secretary Janet Yellen said the United States is considering further sanctions on “dark fleet” tankers and may also impose sanctions on Chinese banks to curb oil revenues from Russia and access to foreign supplies, which are fueling their war in Ukraine, according to Reuters.
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.
