- USD/CAD weakens near 1.3925 in the early hours of the European session on Friday.
- Uncertainty surrounding the US presidential election and geopolitical risks could help limit the USD’s decline.
- Economists support calls for another large rate cut by the BoC.
The USD/CAD pair loses momentum to around 1.3925 during early European trading hours on Friday. The weakening of the US Dollar (USD) drags the pair lower. Traders are preparing for the highly anticipated US Nonfarm Payrolls (NFP) for October, which will be released later on Friday.
The Commerce Department report showed that the US Personal Consumption Expenditure (PCE) Price Index, the Fed’s measure of targeted inflation, rose 2.1% year-on-year in September, compared with 2. .2% in August. This figure was in line with market expectations.
The dollar’s decline could be limited amid uncertainty ahead of the US presidential election next week and ongoing geopolitical tensions in the Middle East, boosting safe-haven currencies like the USD. However, Friday’s US October NFP report could provide clues about the Fed’s interest rate outlook. Any sign of weakness in the US economy or labor market could boost bets of a new large rate cut by the Fed, which could put some selling pressure on the USD.
As for the Loonie, growing expectations that the Bank of Canada (BoC) could make a bigger rate cut again amid signs that the economy has stalled could contribute to the decline of the Canadian Dollar (CAD). Andrew Grantham, senior economist at CIBC, said, “With growth once again looking to miss its already lowered forecast, we continue to forecast policymakers will make another 50 basis point cut at the December meeting.”
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.
