USD/CAD remains steady after registering gains in the previous session, trading around 1.3980 in Asian hours on Friday. The pair appreciated as the US dollar (USD) received support after Federal Reserve (Fed) Chairman Jerome Powell’s comments lowered expectations for further interest rate cuts.
The U.S. Federal Reserve delivered a 25 basis point rate cut on Wednesday, lowering its benchmark interest rate to a range of 3.75%-4.0% by a 10-2 vote. The decision was not unanimous, as Fed Governor Stephen Miran supported a larger cut of 50 basis points, while Kansas City Fed President Jeffrey Schmid voted to keep rates unchanged.
Fed Chairman Jerome Powell noted that the central bank is struggling to balance its dual mandate of controlling inflation and supporting employment due to limited data availability amid the ongoing US government shutdown. Powell warned that policymakers may need to adopt a wait-and-see approach until official data reporting resumes. He also added that another rate cut in December is far from certain, stressing that the outlook remains uncertain.
The USD/CAD pair could face headwinds as the Canadian dollar (CAD) could receive support from signs that the Bank of Canada (BoC) may be ending its policy easing cycle. The BoC cut its interest rate by 25 basis points, bringing its key rate down to 2.25%. The central bank described that level as “about right if inflation and activity develop as expected,” and suggested the latest cut may signal the end of its easing cycle.
Frequently asked questions about the Canadian dollar
The key factors that drive the Canadian dollar (CAD) are the interest rate level set by the Bank of Canada (BoC), the price of oil, Canada’s largest export, the health of the 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 riskier 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 affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects interest rates for everyone. The main objective of the BoC is to maintain inflation at 1-3% by adjusting the interest rate up or down. Relatively higher interest rates tend to be positive for CAD. The Bank of Canada can also use quantitative easing and tightening to affect credit conditions, the former CAD negative and the latter CAD positive.
The price of oil is a key factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so the price of oil tends to have an immediate impact on the CAD value. Generally, if the price of oil rises, so does the CAD, as aggregate demand for the currency rises. 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 also supports the CAD.
While inflation has always traditionally been thought of as a negative factor for a currency as it lowers the monetary value, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure 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 can encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if the economic data is weak, the CAD is likely to fall.