- USD/CAD could rise as the US dollar (USD) receives support from President Trump's trade.
- U.S. Treasury yields rose to 4.31% and 4.47%, respectively, on Wednesday, their highest levels since July, before adjusting lower.
- Commodity-linked CAD is supported by rising oil prices.
USD/CAD retreated from the all-time high of 1.3958 reached in the previous session. The pair was trading around 1.3900 in Asian time on Thursday. However, the downside of the USD/CAD pair may be limited as the US dollar (USD) may receive support from the Trump trade following the Republican victory in the US elections.
However, the US Dollar Index (DXY), which measures the dollar's value against six major currencies, is down from its four-month high of 105.44 hit on Wednesday. DXY is trading near 105.00 as US Treasury yields are revised downward. U.S. yields rose Wednesday to 4.31% and 4.47%, respectively, their highest levels since July.
All eyes will be on the US Federal Reserve's policy decisions on Thursday, with markets expecting a modest 25 basis point (bp) rate cut at its November meeting. The CME FedWatch tool shows there is a 98.1% chance the Fed will cut interest rates by a quarter of a point in November.
The commodity-linked Canadian dollar (CAD) may have received support from improving oil prices, as Canada is the largest oil exporter to the United States (USD). West Texas Intermediate (WTI) crude oil prices are rising towards $72.00 at the time of writing.
A summary of the Bank of Canada (BoC) consultations showed that some officials were concerned that a significant rate cut could heighten concerns about a deepening economic downturn. But central bank officials stressed that markets should not expect a half-point rate cut at every meeting, as future decisions will depend on future economic data.
Canadian Dollar Frequently Asked Questions
The main factors that move 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 the economy, inflation, and the balance of trade. The difference between Canada's exports and imports. Other factors include market sentiment, or whether investors are taking on riskier assets (risk-on) or seeking a safe haven (risk-off). Risk-on is Canadian dollar plus. The health of the US economy, our largest trading partner, is also an important factor influencing the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the interest rate levels at which banks can lend to each other. This affects interest rate levels for everyone. The BoC's main goal is to keep inflation between 1 and 3 percent by adjusting interest rates up and down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and monetary tightening to influence credit conditions, with the former being CAD negative and the latter CAD positive.
Oil prices are an important factor influencing the value of the Canadian dollar. Oil is Canada's largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. Generally, when oil prices rise, the CAD also rises because aggregate demand for the currency increases. The opposite is true if oil prices fall. Higher oil prices tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has traditionally been considered a negative factor for currencies because it reduces the value of money, the opposite is actually true in modern times where cross-border capital controls have been relaxed. Rising inflation rates tend to cause central banks to raise interest rates, which in turn increases capital inflows from global investors looking for lucrative places to store their money. This increases the demand for the local currency (in the case of Canada, the Canadian dollar).
The release of macroeconomic data gauges the health of the economy and can impact 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. In addition to attracting more foreign investment, it could prompt the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic indicators are weak, the CAD may decline.
