Market Data 
- USD/CAD continues to attract buyers and draw support from a combination of factors.
- Bets for a larger BoC rate cut, along with bearish Crude Oil prices, undermine the Loonie.
- Expectations for a less aggressive Fed easing lend support to the Greenback and the pair.
The USD/CAD pair trades near its highest level since August 5, around the 1.3920-1.3925 region during the Asian session on Wednesday and seems poised to prolong its recent upward trajectory witnessed over the past month or so. A combination of factors might continue to weigh on the Canadian Dollar (CAD), which, along with the emergence of some US Dollar (USD) dip-buying, validate the near-term positive outlook for the currency pair.
The Bank of Canada (BoC) Governor Tiff Macklem sounded dovish last Friday and said that the headline GDP will be lower if population growth slows faster than assumed. Furthermore, Macklem, speaking to the House of Commons finance committee on Tuesday, reiterated that the central bank would be able to cut rates further if the economy evolved broadly in line with forecasts. Adding to this, the recent slump in Crude Oil prices, triggered by concerns about flagging global demand growth, is seen undermining the commodity-linked Loonie and acting as a tailwind for the USD/CAD pair.
The US Dollar (USD), on the other hand, attracts some dip-buying and stalls the previous day’s modest pullback from its highest level since July 30 amid growing acceptance that the Federal Reserve (Fed) will proceed with smaller rate cuts. Adding to this concerns that the spending plans of Vice President Kamala Harris and the Republican nominee Donald Trump will further increase the deficit remain supportive of elevated US Treasury bond yields. This, in turn, supports prospects for a further USD appreciation and suggests that the path of least resistance for the USD/CAD pair is to the upside.
Traders, however, might refrain from placing aggressive bets and opt to move to the sidelines ahead of key US macro releases, featuring the ADP report on private-sector employment and the Advance Q3 GDP print. The market attention will then shift to the US Personal Consumption Expenditure (PCE) Price Index on Thursday and the closely watched US Nonfarm Payrolls (NFP) report on Friday. The data should provide fresh cues about the Fed’s interest rate outlook, which, in turn, will influence the USD price dynamics and help determine the next leg of a directional move for the USD/CAD pair.
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.
