Canadian Dollar cycles familiar territory as markets focus elsewhere

The Canadian Dollar continues to find familiar ground near 1.3500 against the Greenback.
A lack of data from Canada leaves the CAD at the mercy of market flows.
US jobs preview figures outpace forecasts with NFP Friday looming ahead.

The Canadian Dollar (CAD) eased slightly on Wednesday as overall risk-off flows bump the Greenback higher. Middle East geopolitical tensions and overall investor outlook on upcoming US jobs figures dominate market attention during the midweek market session.

Canada released updated Purchasing Managers Index (PMI) to very little fanfare earlier this week, but precursor US Nonfarm Payolls (NFP) figures took center stage on Wednesday as investors grapple with hopes for further Federal Reserve (Fed) rate cuts.

Daily digest market movers

The Canadian Dollar found little momentum on Wednesday, shedding a scant tenth of a percent against the US Dollar.
Canada’s S&P PMI in September returned to positive territory above 50.0 for the first time since May of 2023 this week, printing at 50.4 and finding its highest value since March of 2023. Despite the upturned activity outlook, the CAD has found very little bullish momentum.
Market participants are grappling with an upshot in US labor figures on Wednesday; US ADP Employment Change figures came in much higher than expected, crimping odds of further jumbo rate cuts from the Fed.
While rising US labor figures ahead of Friday’s NFP labor print is a good thing, investors desperate for further 50 bps rate cuts from the Fed in 2024 are set to be disappointed as central planners hinge the size of future rate cuts on labor market performance.
CAD traders will have to wait until Friday for any more Canadian economic data. Canada’s Ivey PMI figures are likely to be entirely eclipsed by the hotly-anticipated NFP release.

Economic Indicator

ADP Employment Change

The ADP Employment Change is a gauge of employment in the private sector released by the largest payroll processor in the US, Automatic Data Processing Inc. It measures the change in the number of people privately employed in the US. Generally speaking, a rise in the indicator has positive implications for consumer spending and is stimulative of economic growth. So a high reading is traditionally seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

Traders often consider employment figures from ADP, America’s largest payrolls provider, report as the harbinger of the Bureau of Labor Statistics release on Nonfarm Payrolls (usually published two days later), because of the correlation between the two. The overlaying of both series is quite high, but on individual months, the discrepancy can be substantial. Another reason FX traders follow this report is the same as with the NFP – a persistent vigorous growth in employment figures increases inflationary pressures, and with it, the likelihood that the Fed will raise interest rates. Actual figures beating consensus tend to be USD bullish.

CAD price forecast

The Canadian Dollar (CAD) continues to grind out a sideways technical pattern on daily candlesticks; USD/CAD is caught in a volatility trap just south of the 200-day Exponential Moving Average (EMA near the 1.3600 handle, but the Loonie remains unable to break into a fresh bullish rally against the Greenback.

USD/CAD daily chart

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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