USD/CAD trades between tepid gains and losses as outlook for both currencies weighs

USD/CAD trades in the 1.3580s, seesawing between tepid gains and losses as both the US Dollar (USD) and the Canadian Dollar (CAD) weaken due to expectations that interest rates will fall more rapidly in both countries compared to their peers. 

The expectation of lower interest rates is negative for currencies as it tends to reduce foreign capital inflows. The US Dollar (USD) is down in most of its pairs after market bets surged that the US Federal Reserve (Fed) will cut interest rates by a larger-than-standard 0.50% at its meeting on Wednesday. Such a cut would bring the bank’s key interest rate down to 4.75% - 5.00%. 

The Canadian Dollar (CAD), meanwhile, has weakened after commentary from the Governor of the Bank of Canada (BoC), Tiff Macklem, over the weekend. The BoC chief said “if growth does not materialize as expected…it could be appropriate to move faster [on] interest rates.” This suggested the BoC could cut interest rates, which are currently at 4.25%, sooner than previously thought. 

USD/CAD is edging lower, however, as the US Dollar seems to fractionally weaken the more of the two. The market-based probabilities of the Fed cutting by 0.50% have risen to 69% on Monday, based on the CME FedWatch tool. This is substantially higher than the circa 15% in the middle of last week. The CME tool uses the price of 30-day fed funds futures to calculate its probabilities. 

Many strategists still expect a standard 0.25% cut from the Fed. “ We continue to believe the data warrant a 25 bp cut, as does the majority of analysts polled by Bloomberg,” said Dr. Win Thin, Global Head of Markets Strategy at Brown Brother Harriman (BBH). Thus, if expectations of a 0.50% cut do not materialize, the USD/CAD could find some support. 

The BoC has already cut its prime rate by 0.75% in 2024, most recently in September, with a 0.25% reduction. Macklem’s concerns about growth, therefore, despite the recent reduction, come as a surprise to markets, fueling the sell-off in the CAD. 

Tumbling crude Oil prices are another factor that weighs on the CAD since Oil is the country’s most important export. WTI crude Oil trades in the $68 per barrel region on Monday after bottoming at $64.75 – but still remains below $70 and suffers from a negative outlook.