Market Data 
- USD/CAD holds steady around 1.3500 in Friday’s early Asian session.
- US ISM Services PMI came in stronger than expected, while private sector payrolls grew the smallest gain since 2021 in August.
- The US and Canadian employment reports will be the highlights on Friday.
The USD/CAD pair trades on a flat note near 1.3500 during the early Asian session on Friday. The US Dollar Index (DXY) extends its decline to near the 101.00 psychological support level. Traders prefer to wait on the sidelines ahead of the key events on Friday. The US and Canadian employment reports will take center stage later in the day.
Data released by Automatic Data Processing (ADP) on Thursday showed that private sector employment increased by 99,000 in August and annual pay was up 4.8% year-over-year. This figure followed the 111,000 (revised from 122,000) increase seen in July and below the estimation of 145,000 by a wide margin.
Meanwhile, the weekly US Initial Jobless Claims rose to 227,000, compared to the previous reading of 232,000 (revised from 231,000) and below the initial consensus of 231,000). On the positive side, US ISM Services PMI rose to 51.5 in August from 51.4 in July, above the market expectation of 51.1.
A rise in the US Unemployment Rate in July sparked fears of a looming recession in the United States and triggered the expectation of a larger rate cut by the Federal Reserve (Fed). The employment data will be released on Friday, including Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings. These reports could significantly influence the size and pace of the Fed’s easing cycle. Any signs of a weaker US labor market could exert some selling pressure on the Greenback in the near term.
On the other hand, the speculation that the Bank of Canada (BoC) will cut additional interest rates this year might undermine the Loonie and cap USD/CAD’s downside. The BoC cut its benchmark interest rate for the third consecutive time on Wednesday. The BoC governor Tiff Macklem said “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.” Looking ahead, the Canadian employment data will also be in the spotlight on Friday.
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.
