- USD/CAD trades flat around 1.3860 in Friday’s early Asian session.
- The Fed decided to cut the interest rate by a quarter percentage point on Thursday.
- The Canadian employment report will be closely watched.
The USD/CAD pair flat lines near 1.3860 during the early Asian session on Friday. The Greenback faces some selling pressure after the US Federal Reserve's interest rate decision. Later on Friday, the advanced Michigan Consumer Sentiment and the Fed’s Bowman speech will be in the spotlight, along with the Canadian employment report.
As widely expected, the Federal Open Market Committee (FOMC) lowered its benchmark overnight borrowing rate by 25 basis points (bps) to a target range of 4.50%-4.75% at its November meeting on Thursday. Fed Chair Jerome Powell said the central bank is pursuing interest rate cuts as monetary policy still remains tight, adding that the Fed will continue assessing data to determine the "pace and destination" of interest rates as inflation has slowed nearing the Fed’s 2% target.
The US Dollar (USD) edges lower after the Fed’s Powell failed to offer any strong clues about the path of the rate cut in the near term. According to the CME Group's Fed Watch Tool, traders are pricing a 75% chance the Fed will cut rates again in December, up from 69% before the Fed rate decision.
Data released by the US Department of Labor (DoL) on Thursday showed that the Initial Jobless Claims climbed to 221K in the week ending October 25. This figure matched initial estimates and was higher than the previous reading of 218K (revised from 216K).
The Canadian employment report is due later on Friday. The unemployment rate is expected to tick higher to 6.6% in October from 6.5% in September. Any signs of a weakening labor market in Canada could support the Bank of Canada (BoC) making another super-sized interest rate cut and weighing on the Loonie.
“A further loosening in the labor market, primarily through a higher unemployment rate, would increase the odds of a 50-basis-point [cut] for a second straight [Bank of Canada] meeting in December,” noted Benjamin Reitzes, managing director and Canadian rates and macro strategist at BMO Capital Markets.
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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