- USD/CAD trades in negative territory for the third consecutive day around 1.4010 in Friday’s early Asian session.
- The weakness in the US Dollar (USD) weighs on the pair, but potential downside seems limited.
- Canada’s Q3 GDP growth report will be in the spotlight on Friday.
The USD/CAD pair extends its downside to near 1.4010 during the early Asian session on Friday, pressured by the weakening of the US Dollar (USD) after the holiday-thinned market. All eyes will be on Canada’s Gross Domestic Product (GDP) growth number for the third quarter (Q3), which is due later on Friday.
The Greenback edges lower due to the month-end flows and some profit-taking for the US long weekend. Nonetheless, the cautious stance of the US Federal Reserve (Fed) might help limit the USD’s losses. The FOMC Minutes released on Tuesday showed that Fed officials see interest rate cuts ahead but at a gradual pace as inflation eases and the labor market remains strong.
On the Loonie front, traders brace for Canada’s third-quarter GDP growth, which is expected to grow 1.0% on an annualized basis in Q3, compared to the previous reading of 2.1%. On a monthly basis, Canadian GDP is estimated to expand 0.3% MoM in September, compared to August’s flat 0.0% print.
Any signs of slower growth in the Canadian economy might push the Bank of Canada (BoC) to deliver a second consecutive 50 basis points (bps) rate cut at the upcoming next rate decision on December 11. This, in turn, could drag the Canadian Dollar (CAD) lower and act as a tailwind for USD/CAD.
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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