- USD/CAD weakens to near 1.3945 in Monday’s Asian session.
- Scott Bessent's nomination as US Treasury Secretary weighs on the USD.
- Canada's Retail Sales rose 0.4% MoM in September, as expected.
The USD/CAD pair drifts lower to around 1.3945 during the Asian session on Monday. The weakening of the US Dollar and lower US Treasury bond yields after President-elect Donald Trump said he will nominate Scott Bessent as US Treasury secretary weighs on the pair.
Donald Trump announced on Friday night that he will nominate Scott Bessent to be the secretary of the US Department of the Treasury. This, in turn, drags the USD lower by the most in over two weeks. However, the markets expect that Trump’s administration will reignite inflation and slow the path of rate cuts from the Federal Reserve (Fed), which might help limit the USD’s losses. Trump has vowed to impose massive new tariffs, eyeing a duty of 10% to 20% on all foreign goods and 60% or higher on goods coming from China.
On the Loonie front, Canada's Retail Sales grew 0.4% MoM in September, in line with the consensus, according to Statistics Canada on Friday. Retail Sales ex Autos climbed 0.9% MoM in September versus -0.8% prior, beating the estimation of 0.5%. Currency markets trimmed their bets for a 50 basis points (bps) rate reduction next month to around 14%, down from 21% before the data. They see an 86% chance of a 25 bps rate cut on December 11.
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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