USD/CAD dips below 1.3750 on Fed easing bets, rising Oil prices
- USD/CAD weakens as Fed easing expectations grow, reinforced by President Trump’s calls for lower borrowing costs.
- Fed’s Miran said failing to ease policy raises recession risks, adding the need to dissent for a 50 bps cut diminishes as rates fall.
- The commodity-linked CAD gains support from higher Oil prices amid rising geopolitical tensions.
USD/CAD extends its losses for the second successive session, trading around 1.3740 during the Asian hours on Tuesday. The pair depreciates as the US Dollar (USD) faces headwinds amid growing expectations that the Federal Reserve will continue easing policy, reinforced by President Donald Trump’s calls for lower borrowing costs.
Federal Reserve (Fed) Member of the Board of Governors Stephen Miran said in an interview on Bloomberg TV on Monday that the last few months have seen data consistent with his view of the world and that he doesn’t see a recession in the near term. Miran said that failing to ease policy would raise recession risks, adding that the need to dissent for a 50 basis points diminishes over time as rates are reduced.
Traders await the US Gross Domestic Product (GDP) Annualized for the third quarter due on Tuesday. The US economy is estimated to have expanded at an annual rate of 3.2% in the third quarter. It would be a slowdown from the 3.8% growth in Q2.
The USD/CAD pair struggles as the US Dollar weakens alongside a rally in precious metals, driven by safe-haven demand amid rising United States (US)–Venezuela tensions. The commodity-linked Canadian Dollar (CAD) gains support from higher Oil prices amid geopolitical tensions, reflecting Canada’s status as the largest crude exporter to the US.
West Texas Intermediate (WTI) Oil price trades around $57.90 per barrel at the time of writing. Oil prices rise as traders remain focused on heightened geopolitical risks. US President Donald Trump said on Monday that the US would keep and maybe sell the Oil it had seized off the coast of Venezuela in recent weeks. Trump added that the US would also keep the seized ships.
Ukraine continues strikes on Russian energy infrastructure, with the latest attack damaging two vessels and two piers and igniting a fire in a Black Sea coastal village, a key corridor for Russia’s energy exports.
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.