USD/CAD marks fresh multi-year highs near 1.4350, awaits Fed’s guidance
- USD/CAD has marked 1.4329, a level not seen since March 2020, on Wednesday.
- The Canadian Dollar faces challenges due to the dovish BoC and domestic political uncertainty.
- CME FedWatch tool suggests almost fully pricing in a 25 basis point cut on Wednesday.
USD/CAD extends its winning streak for the fifth consecutive day, trading around 1.4320 during the Asian hours on Wednesday. This upside could be attributed to the tepid Canadian Dollar (CAD) following dovish remarks from the Bank of Canada (BoC) Governor Tiff Macklem.
Bank of Canada (BoC) Governor Tiff Macklem stated on Monday that the central bank is preparing for a future characterized by heightened uncertainty and increased vulnerability to economic shocks. He emphasized that the BoC will evaluate the need for further policy rate cuts on a case-by-case basis and anticipates a more gradual approach to monetary policy if the economy unfolds as projected.
Meanwhile, Canadian Prime Minister Justin Trudeau is facing growing pressure to resign after Finance Minister Chrystia Freeland announced on Monday that she is stepping down from the Cabinet, according to CNN.
The Consumer Price Index (CPI) released by Statistics Canada fell to 1.9% year-over-year in November, slightly below the market expectation of 2.0%. On a monthly basis, the CPI remained flat, aligning with forecasts, after rising 0.4% in October. Meanwhile, monthly core inflation declined by 0.1%, bringing the annual core CPI inflation rate down to 1.6% from October's 1.7%.
Traders are bracing for a potential 25 basis point rate cut by the US Federal Reserve (Fed) later in the North American session. According to the CME FedWatch tool, markets are now almost fully pricing in a quarter basis point cut at the Fed's December meeting. Additionally, traders will closely monitor Fed Chair Jerome Powell's press conference and Summary of Economic Projections (dot-plot) after the meeting.
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.