- USD/CAD recovers from 1.3980 following the release of Canadian GDP data, which was generally weaker than expected.
- The Canadian economy grew 0.1% in September, slower than estimates of 0.3%.
- A slight bounce in the US Dollar has also fueled the recovery of the CAD pair.
The USD/CAD pair rebounds after recording a new three-day low near 1.3980 in the North American session on Friday. The CAD pair recovers as Statistics Canada has reported slower than expected Gross Domestic Product (GDP) growth in the month of September. The agency showed the Canadian economy expanded 0.1% after remaining flat in August. Economists expected the economy to have grown 0.3%.
The agency also reported that growth in the third quarter of the year was 0.3%, slower than 0.5% in the previous quarter. Meanwhile, compared to the third quarter of the previous year, GDP growth was 1%, as expected, softer than the 2.2% growth in the second quarter of the current year.
The moderate expansion in Canadian output is expected to raise expectations for more significant interest rate cuts by the Bank of Canada (BoC). The BoC cut its key interest rates by 50 basis points in October.
Meanwhile, a slight recovery in the US Dollar (USD) has also boosted the CAD pair. The USD recovered some of its intraday losses, suggesting that a short-term bottom has formed. The US Dollar Index (DXY), which tracks the value of the USD against six major currencies, recovers after recording a new two-week low near 105.60.
The correction in the US Dollar began when United States (US) President-elect Donald Trump nominated Scott Bessent to serve as Treasury Secretary. Market participants expect Bessent to execute Trump’s stated trade policies strategically and gradually, which will not lead to inflationary pressures quickly.
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, 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.
