The US Dollar is trading flat, around the 1.4100 level against the Canadian Dollar, after failing to break above 1.4130 on Friday. The pair is looking for direction on a doleful trading session on Monday, weighed down by a mild appetite for risk.
The Greenback was hit on Friday by the dovish comments of New York Federal Reserve (Fed) President, John Williams, who renewed hopes of further monetary easing in the coming months. Williams said that the bank has room to cut interest rates further without putting the bank’s inflation targets at risk, which boosted market sentiment on Friday and sent the US Doillar lower accorss teh board.
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Williams’ comments offset the impact of fairly positive US business activity figures and the improving Michigan Consumer Sentiment Survey released later on the day.
The odds for a quarter-point rate cut after the Fed’s December 10 meeting have increased to 75%, following Williams’ comments, from around 40% one week ago, according to data released by the CME Group’s Fedwatch Tool. This is putting some pressure on the US Dollar on Monday, but the Greenback’s downside attempts remain limited, as traders acknowledge the wide divergence within the Fed’s monetary policy committee and assume that December’s Decision will be a coin toss.
In Canada, declining Oil prices, the country’s main import, are keeping Canadian Dollar bulls in check. US and Ukrainian representatives keep working on a framework for a peace deal that might alleviate sanctions on Russian crude and boost supply at a time when a weak outlook for global demand is triggering serious concerns of an Oil glut.
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.