- 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.
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
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.
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.
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.
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.
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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