- USD/CAD could appreciate as the US Dollar (USD) receives support from Trump’s trading.
- US Treasury yields correct lower after rising to 4.31% and 4.47%, respectively, on Wednesday, their highest levels since July.
- The commodity-linked CAD receives support from improving crude oil prices.
USD/CAD retreats from its all-time high of 1.3958, reached in the previous session. The pair is trading around 1.3900 during Asian hours on Thursday. However, this decline in the USD/CAD pair could be limited as the US Dollar (USD) could receive support from Trump’s trading following the Republicans’ victory in the US elections.
However, the US Dollar Index (DXY), which measures the value of the US dollar against its six major peers, retreated from a four-month high of 105.44, recorded on Wednesday. The DXY is trading around 105.00 amid a downward correction in US Treasury yields. US yields rose to their highest levels since July at 4.31% and 4.47%, respectively, on Wednesday.
The US Federal Reserve’s (Fed) policy decision will be watched on Thursday, with markets expecting a modest 25 basis point rate cut at the November meeting. The CME’s FedWatch tool shows a 98.1% probability of a quarter-point rate cut by the Fed in November.
The commodity-linked Canadian Dollar (CAD) could have received support from improving oil prices, as Canada is the largest oil exporter to the United States (USD). The price of West Texas Intermediate (WTI) oil is appreciating towards $72.00 at the time of writing.
A summary of Bank of Canada (BoC) discussions showed concerns among some officials that a big rate cut could raise fears of a deeper economic recession. However, BoC officials stressed that markets should not expect half-point cuts at each meeting, as future decisions will be driven by incoming economic data.
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.
