- USD/CAD is losing momentum around 1.3430 in early Asian trading on Wednesday.
- The CB Consumer Confidence Index stood at 98.7 in September compared to 105.6 previously.
- BoC’s Macklem said the timing and pace of rate cuts will depend on the data.
The USD/CAD pair remains under selling pressure near 1.3430 during the early Asian session on Wednesday. The US Dollar is lower as traders increase their bets on an additional 50 basis points (bps) rate cut by the US Federal Reserve (Fed) in November. Fed Governor Adriana Kugler is scheduled to speak later on Wednesday.
U.S. consumer confidence unexpectedly fell in September, the biggest drop in three years, amid concerns about a weakening labor market and slowing economic growth. The Consumer Confidence Index fell to 98.7 in September from a revised 105.6 in August, the biggest drop since August 2021, the Conference Board reported Tuesday.
The downbeat report has triggered expectations of further rate cuts by the Fed in November, which continues to undermine the broader US Dollar (USD). Traders are now pricing in a nearly 56% chance of a second 50bp rate cut at the November meeting, while the probability of a 25bp cut stands at 44%, according to the CME’s FedWatch tool.
On the Loonie front, Bank of Canada (BoC) Governor Tiff Macklem said Tuesday that the central bank will continue to carefully monitor consumer conditions in Canada, stressing that the timing and pace of BoC rate cuts will depend on data. “The timing and pace will be determined by incoming data and our assessment of what that data means for future inflation,” Macklem noted. The BoC’s next interest rate decision is scheduled for Oct. 23, with money markets pricing in more than 58% of 50bp rate cuts. Another 25bp cut is priced in for its final meeting of the year in December.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. 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) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures 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 confidence surveys can 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, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
