USD/CAD posts modest gains near 1.4000 as traders brace for FOMC Minutes
|- USD/CAD trades with a mild positive bias around 1.3990 in Tuesday’s early Asian session.
- The US Dollar eases from a two-year high amid the profit-taking.
- Lower crude oil prices undermine the commodity-linked Loonie.
The USD/CAD pair trades with mild 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 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 Trade remains alive. Donald Trump announced on Friday that he will nominate Scott Bessent to be the secretary of the US Department of the Treasury. “Some market participants see him as less negative about a trade war, considering his comments on a phased approach for implementing tariffs,” said UBS Commodity Analyst Giovanni Staunovo.
Traders pared back their expectations for an interest rate cut in December. According to the CME FedWatch Tool, futures traders are now pricing in a 55.9% odds that the Fed will cut rates by a quarter point, down from around 69.5% a month ago. The FOMC Minutes will be in the spotlight on Tuesday, along with the Conference Board’s Consumer Confidence, New Home Sales, the Richmond Fed Manufacturing Index, and the Dallas Fed Services Index.
On the other hand, the decline in crude oil prices could weigh on the Loonie in the near term. It's worth noting that Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all 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 put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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