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9 Jan 2025
USD/CAD holds below 1.4400 as traders await Fedspeak
- USD/CAD softens to around 1.4380 in Thursday’s early Asian session.
- Fed Minutes signalled a cautious approach to rate cuts.
- Justin Trudeau’s resignation and a rise in crude oil prices support the Loonie.
The USD/CAD pair weakens to near 1.4380 during the early Asian session on Thursday. The resignation of Canadian Prime Minister Justin Trudeau and higher crude oil prices provide some support to the Loonie. Traders will take more cues from the Fedspeak on Thursday. The Canadian and the US employment data for December will be the highlights on Friday.
The prospect of a slower pace of interest rate cuts by the US Federal Reserve (Fed) could lift the Greenback in the near term. The Minutes from the Federal Reserve’s (Fed) December 17-18 meeting showed policymakers agreed inflation was likely to continue slowing this year but also saw a rising risk that price pressures could remain sticky due to the potential effect of Donald Trump's policies.
On the Loonie front, Canadian Prime Minister Justin Trudeau announced his resignation on Monday, saying he intended to step down from the leader of Canada’s ruling Liberal Party once a new party leader is chosen. A Canadian election may take place in the spring and must be held on October 20, with polls indicating that the opposition Conservatives will win. This, in turn, boosts the Canadian Dollar (CAD) against the USD. Additionally, a rise in crude oil prices contributes to the CAD’s upside as Canada is the largest oil exporter to the United States.
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.