- USD/CAD is trading in negative territory for the third consecutive day around 1.4010 in the early Asian session on Friday.
- US Dollar (USD) weakness weighs on the pair, but downside potential appears limited.
- Canada’s third-quarter GDP growth report will be in the spotlight on Friday.
The USD/CAD pair extends its decline to near 1.4010 during the early Asian session on Friday, pressured by the weakening US Dollar (USD) following the holiday-reduced market. All eyes will be on Canada’s gross domestic product (GDP) growth figure for the third quarter (Q3), which will be released later on Friday.
The dollar falls due to end-of-month flows and profit-taking from the long weekend in the US. However, the cautious stance of the US Federal Reserve (Fed) could help limit the USD losses. FOMC Minutes released Tuesday showed that Fed officials see interest rate cuts ahead, but at a gradual pace as inflation eases and the labor market remains strong.
Turning to the Loonie, traders are bracing for Canada’s third-quarter GDP growth, which is expected to grow 1.0% annualized in Q3, compared to the previous reading of 2.1%. On a monthly basis, Canadian GDP is estimated to grow 0.3% MoM in September, compared to a flat 0.0% reading in August.
Any sign of slower growth in the Canadian economy could lead the Bank of Canada (BoC) to make a second consecutive rate cut of 50 basis points (bps) in the next rate decision on December 11. This, in turn, could drag the Canadian Dollar (CAD) lower and act as a tailwind for USD/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, 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.
