- USD/CAD gathers strength to around 1.3620 in Tuesday’s early Asian session.
- The upbeat job data prompted traders to scale back bets on further jumbo Fed rate reductions.
- Higher crude oil prices might cap the downside for the Loonie.
The USD/CAD pair extends the rally to near 1.3620 during the early Asian session on Tuesday. Strong labor market data on Friday caused traders to sharply ratchet back bets on aggressive Federal Reserve (Fed) interest-rate cuts, which boosts the US Dollar (USD) broadly.
The US employment reports on Friday showed a rise in Nonfarm Payrolls (NFP) and a decline in the Unemployment Rate, prompting traders to scale back bets on further Fed rate reductions. Investors expect the US central bank to cut rates by just 25 basis points (bps) in the November meeting, rather than 50 bps. This, in turn, provides some support to the USD.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, stalled near the highest level since mid-August around 102.50. According to the CME FedWatch Tool, the markets are now pricing in around 85% chance of 25 bps Fed rate cuts in November, up from 31.1% last week.
However, Minneapolis Fed President Neel Kashkari said on Monday that he supported the Fed's decision to cut rates by 50 bps, adding that the balance of risks shifted from "high inflation towards maybe higher unemployment. Traders will take more cues from the speeches from the Fed’s Raphael Bostic, Phillip Jefferson and Susan Collins on Tuesday. Any dovish comments from the Fed officials could drag the Greenback lower against the Canadian Dollar (CAD).
The upside of the pair might be limited as traders are concerned about oil supply disruption amid persistent geopolitical tensions in the Middle East. This might lift the commodity-link Loonie and act as a headwind for USD/CAD. Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive 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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD holds steady near 1.0400 in quiet trading
EUR/USD continues to fluctuate in a tight channel at around 1.0400 in the European session on Friday. The absence of fundamental drivers and thin trading conditions on the holiday-shortened week make it difficult for the pair to find direction.
GBP/USD declines toward 1.2500 as markets turn cautious
GBP/USD stays under modest bearish pressure and retreats toward 1.2500 on Friday after posting small losses on Thursday. The cautious market mood doesn't allow the pair to gain traction, while trading volumes remain low following the Christmas break.
Gold struggles to build on weekly gains, holds above $2,620
Gold enters a consolidation phase and trades below $2,630 on Friday after closing in positive territory on Thursday. The risk-averse market atmosphere helps XAU/USD limit its losses as investors refrain from taking large positions heading into the end of the holiday-shortened week.
Bitcoin misses Santa rally even as on-chain metrics show signs of price recovery
Bitcoin (BTC) price hovers around $97,000 on Friday, erasing most of the gains from earlier this week, as the largest cryptocurrency missed the so-called Santa Claus rally, the increase in prices prior to and immediately following Christmas Day.
2025 outlook: What is next for developed economies and currencies?
As the door closes in 2024, and while the year feels like it has passed in the blink of an eye, a lot has happened. If I had to summarise it all in four words, it would be: ‘a year of surprises’.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.