The USD/CAD pair has been gaining ground due to the strength of the US Dollar (USD), which is linked to the diminishing likelihood of further rate cuts by the Federal Reserve (Fed) following the release of robust US labor and inflation data. Currently trading at around 1.3770 during the early European hours on Thursday, market expectations show that there could be a total of 125 basis points (bps) in rate cuts by the Fed within the next year. According to the CME FedWatch Tool, there is a 92.1% probability of a 25-basis-point rate cut in November, with no anticipation of a larger 50-basis-point reduction.
Traders are eagerly awaiting the US Retail Sales data, which is set to be released later in the day. Expectations are for monthly consumer spending to increase by 0.3% in September, higher than the 0.1% in the previous reading. On the other hand, the Canadian Dollar (CAD) is facing challenges as Canada’s latest inflation report for September has reignited expectations for a 50 basis point rate cut by the Bank of Canada (BoC) next week. The annual inflation rate dropped to 1.6% in September, the lowest since February 2021, falling below the central bank’s 2% target.
In addition, the Standard Chartered Research report predicts that the BoC will implement a 50 basis point rate cut instead of the previously expected 25 bps at both of its remaining meetings in 2024. Various factors such as slowing economic growth, declining inflation, rising inflation expectations, and increasing mortgage costs are contributing to the case for deeper rate cuts. The forecast now sees the BoC’s policy rate at 3.25% by the end of 2024 and 2.25% by the end of 2025, down from previous estimates of 3.75% and 3.0%, respectively.
The Canadian Dollar is influenced by various factors such as 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 Trade Balance. Market sentiment, particularly whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off), also plays a role in determining the value of the CAD. The health of the US economy, as Canada’s largest trading partner, is another key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) plays a significant role in influencing the Canadian Dollar by setting interest rates that impact borrowing costs for banks and individuals. Maintaining inflation within the 1-3% range is the main goal of the BoC, and adjustments in interest rates can help achieve this target. Generally, higher interest rates tend to be positive for the CAD. The BoC can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive.
The price of Oil is crucial in determining the value of the Canadian Dollar since petroleum is Canada’s major export. Changes in Oil prices have an immediate impact on the CAD value, with increases in Oil prices generally leading to a stronger CAD as demand for the currency rises. Higher Oil prices also tend to result in a positive Trade Balance, which further supports the Canadian Dollar. Overall, factors such as inflation rates, macroeconomic data releases, and the overall health of the economy can all impact the direction of the Canadian Dollar.
