USD/CAD rebounds after registering losses in the previous day, trading around 1.4230 during the Asian hours on Friday. The currency pair continues to gain ground as the US Dollar (USD) receives strong support. This momentum is driven by persistent inflation concerns stemming from elevated energy costs, alongside market expectations of higher US interest rates.
Ahead of Friday’s release of the US September employment data, traders are paying close attention for signals regarding the future direction of Federal Reserve (Fed) monetary policy. Economists project Nonfarm Payrolls to show an addition of 90,000 jobs, marking a slowdown from the 162,000 recorded in the previous month, while the Unemployment Rate is expected to remain unchanged at 4.1%.
Meanwhile, the USD/CAD pair’s upward momentum is being reinforced by weakness in the commodity-linked Canadian Dollar, which is coming under pressure due to falling crude oil prices. Oil prices recently pulled back as regional supply flows from the Middle East largely recovered to prewar levels.
However, market participants remain skeptical that this supply recovery can be sustained without a formal agreement to end the conflict, especially following attacks on at least three tankers in the Strait of Hormuz and repeated strikes on regional refineries by Iran and its Houthi allies.
Looking ahead, crude prices could quickly rebound as geopolitical tensions flare up again. The US is considering the deployment of another aircraft carrier to the Middle East, escalating the risk of broader conflict with Iran and threatening further disruption to energy supplies. Additionally, the Pentagon is evaluating the deployment of 10,000 sailors and Marines to the Persian Gulf, giving President Donald Trump expanded operational flexibility should he choose to intensify military action against Iran, strikes he has reportedly signaled could resume after the November midterm elections.
BoC seen in no rush to hike despite flat Canada growth
According to TD Securities, the latest data showing “flat growth in July” reinforces the view that there is “no compelling reason for the BoC to rush into rate hikes in October.” The firm argues that, while activity has stalled on a month-on-month basis, the current backdrop does not warrant an accelerated tightening timetable, and instead supports a more measured approach to future policy moves.
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.
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