USD/CAD trades near 1.4100 after pulling back from seven-month highs

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USD/CAD takes a breather after reaching a seven-month high of 1.4140 in the previous session, trading around 1.4100 during the Asian hours on Thursday. The pair holds slight losses as the US Dollar (USD) declines despite a stronger-than-expected US economic data release on Wednesday.

USD/CAD depreciates despite stronger US economic figures released on Wednesday.
The US Dollar may advance further amid the decreasing likelihood of a Fed rate cut in December.
The CAD gains as Canada’s government boosts capital spending while keeping deficits contained, reinforcing the BoC’s ability to maintain rates.

ADP Employment Change in the US climbed by 42,000 in October, compared to the 29,000 decrease (revised from -32,000) seen in September. This figure came in better than the estimations of 25,000. US ISM Services PMI climbed to 52.4 in October, from 50.0 prior and exceeding analysts’ forecasts of 50.8.

The US Dollar may regain its ground amid the cautious sentiment surrounding the US Federal Reserve (Fed) policy stance for December. Fed funds futures traders are now pricing in a 62% chance of a cut in December, down from 68% a day ago, according to the CME FedWatch Tool.

Fed Chair Jerome Powell signaled a more cautious approach, waiting for more data, which is complicated by the US government shutdown. Powell said that another rate cut in December is far from certain. However, Fed Governor Stephen Miran suggested that another rate cut could be appropriate in December.

The Canadian Dollar (CAD) receives support as Canada’s government ramps up capital spending, keeping deficits low and supporting the Bank of Canada’s (BoC) ability to maintain the policy rate at 2.25%, BBH FX analysts reported.

Canada’s government increased fiscal spending to support higher capital investment. The budget deficit is now projected at -2.5% of GDP for 2025/26 and -2.0% for 2026/27, compared with -1.3% and -0.9%, respectively, in the December 2024 fiscal update.

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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