USD/CAD remains below multi-year highs near 1.4250
- USD/CAD maintains its position below the multi-year high of 1.4245 marked on Friday.
- CME FedWatch tool suggests full pricing in a quarter basis point cut by the Fed on Wednesday.
- The Canadian Dollar faced challenges as the BoC eased its monetary policy aggressively.
USD/CAD inches lower after marking a multi-year high of 1.4245 on Friday, trading around 1.4230 during the Asian hours on Monday. This upside could be attributed to the subdued US Dollar (USD) amid tepid US Treasury yields ahead of the Federal Reserve’s (Fed) interest rate decision, with an increased likelihood of a 25 basis point rate cut in its final monetary policy meeting of 2024.
Market analysts predict that the US central bank will cut rates while preparing the market for a pause, given the robust US economy and inflation stalling above 2%. According to the CME FedWatch tool, markets are now almost fully pricing in a quarter basis point cut at the Fed's December meeting.
The Canadian Dollar (CAD) faced challenges as the Bank of Canada (BoC) eased its monetary policy aggressively. The BoC slashed its borrowing rates by 50 bps to 3.25% last week, as expected, but guided a more gradual easing approach as policy rates have come down significantly. BoC Governor Tiff Macklem warned that US President-elect Donald Trump’s tariffs on their exports will have a significant impact on the economy.
The commodity-linked CAD may receive upward support from crude Oil prices due to the rising likelihood of tighter supplies driven by the implementation of additional US sanctions on major producers Russia and Iran. West Texas Intermediate (WTI) Oil price trades around $70.50 per barrel at the time of writing.
On Friday, US Treasury Secretary Janet Yellen said that the United States is considering further sanctions on "dark fleet" tankers and may also impose sanctions on Chinese banks to curb Russia's Oil revenue and access to foreign supplies, which are fueling its war in Ukraine, per Reuters.
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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