USD/CAD posts modest gains near 1.4000 as traders prepare for FOMC minutes

  • USD/CAD is trading with a slight positive bias around 1.3990 in the early Asian session on Tuesday.
  • US Dollar eases from two-year high amid profit-taking.
  • Lower crude oil prices weaken commodity-linked para.

The USD/CAD cross is trading with slight gains near 1.3990 during the early Asian session on Tuesday. The sell-off in crude oil prices weighs on the commodity-linked Canadian Dollar (CAD) and acts as a tailwind for the USD/CAD. Trading volumes are likely to be low due to the US Thanksgiving holiday on Thursday.

The US Dollar Index (DXY) retreated to two-day lows due to profit taking as the “Trump operation” remains alive. Donald Trump announced on Friday that he will nominate Scott Bessent as secretary of the US Treasury Department. “Some market participants see him as less negative about a trade war, considering his comments about a phased approach to implementing tariffs,” he said UBS commodities analyst Giovanni Staunovo.

Traders lowered their expectations for an interest rate cut in December. According to the CME FedWatch tool, futures traders are now pricing in a 55.9% chance that the Fed will cut rates by a quarter point, down from 69.5% a month ago. The FOMC Minutes will be in the spotlight on Tuesday, along with Conference Board Consumer Confidence, New Home Sales, the Richmond Fed Manufacturing Index and the Dallas Fed Services Index.

On the other hand, the drop in crude oil prices could weigh on the Loonie in the short term. It is worth noting that Canada is the largest exporter of oil to the United States (US), and lower crude oil prices tend to have a negative 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

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