- USD/CAD receives support as the BoC is widely expected to cut interest rates by 50 basis points on Wednesday.
- The commodity-linked CAD faced challenges due to lower crude oil prices.
- The US dollar gains ground as the economy’s resilience has increased the odds of nominal rate cuts by the Fed.
USD/CAD continues to gain ground as the Canadian Dollar (CAD) comes under downward pressure ahead of the Bank of Canada’s (BoC) interest rate decision scheduled for Wednesday. The USD/CAD pair moves above 1.3800 during Asian trading hours on Monday.
Easing price pressures, combined with a notable drop in job growth and household spending, have fueled expectations that the Bank of Canada (BoC) will implement a significant 50 basis point interest rate cut (bp) at its next monetary policy meeting.
Additionally, lower oil prices have put pressure on the commodity-linked Canadian dollar, as Canada is the largest oil exporter to the United States (US). Last week, crude oil prices depreciated more than 7%, partly due to slowing economic growth in China and easing tensions in the Middle East. The price of West Texas Intermediate (WTI) oil is trading around $69.00 per barrel at the time of this writing.
The US Dollar (USD) receives support due to decreasing chances of further aggressive rate cuts by the US Federal Reserve (Fed) in 2024. Last week’s data showed the resilience of the economy US, which has strengthened the probability of a nominal rate cut by the Federal Reserve (Fed) in November.
According to the CME FedWatch tool, the probability of a 25 basis point rate cut in November has increased to 99.3%, up from 89.5% the previous week.
US monthly retail sales rose 0.4% in September, outperforming the 0.1% increase recorded in August and the expected 0.3% gain. Additionally, US initial jobless claims fell by 19,000 during the week ending October 11, the largest drop in three months. The total number of applications fell to 241,000, significantly below the 260,000 anticipated.
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.
