USD/CAD extends the rally above 1.3800 as odds of BoC rate cut rise

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The USD/CAD pair extends its upside to near 1.3830 during the early European trading hours on Monday. A weaker Canadian job report undermines the Canadian Dollar (CAD) against the US Dollar (USD). The US Producer Price Index (PPI) for August will be the highlight later on Wednesday.

USD/CAD strengthens to around 1.3830 in Monday’s early Asian session.
Canada's economy lost 65.5K jobs in August, weaker than expected.
Concerns over political instability could boost the safe-haven currency, like the US Dollar.

Data released by Statistics Canada on Friday showed that Canada's economy lost 65,500 jobs in August versus -40.8 prior, pushing the Unemployment Rate up to 7.1%. The unexpected drop marks the highest unemployment level since 2016 outside of the pandemic.

These weaker-than-expected job reports strengthen the case for rate cuts by the Bank of Canada (BoC), though they disagree on how far and how fast the central bank will move. This, in turn, exerts some selling pressure on the CAD and creates a tailwind for the pair.

The political uncertainty gripping Japan, the world's fourth-largest economy, and France, the Eurozone's second-biggest economy, might boost the safe-haven flows, supporting the US Dollar. Investors will closely monitor French Prime Minister Francois Bayrou's confidence vote, which he is expected to lose on Monday. Meanwhile, Japan’s Prime Minister Shigeru Ishiba announced on Sunday that he will step down as leader of the world’s fourth-largest economy.

The US Nonfarm Payrolls (NFP) report on Friday showed a slowdown in hiring in August, while the Unemployment Rate rose to the highest level since 2021, boosting Fed rate cut expectations. Following the data, traders are now almost certain that the Fed will lower rates at its upcoming meeting on September 17, with an 84% chance of it being a 25 basis points (bps) cut and a 16% possibility of a more aggressive 50 bps reduction.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

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