USD/CAD extends its losses for the third successive day, trading around 1.3940 during the Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) remains subdued ahead of the US Federal Reserve (Fed) policy decision due later in the day.
The Fed is widely expected to lower interest rates by another quarter point, bringing the benchmark rate to 3.75-4.00%, at its October meeting. The CME FedWatch Tool indicates that markets are now pricing in a 25-basis-point Fed rate cut in October and a 91% possibility of another reduction in December.
Traders will be watching for any signals from Fed Chair Jerome Powell regarding the pace of future easing, as markets have already priced in another rate cut in December. The October CNBC Fed Survey also indicates that the Fed could implement additional rate reductions over the next two meetings.
The US Dollar received support from the optimism over the upcoming meeting between US President Donald Trump and Chinese President Xi Jinping, due on Thursday. The Greenback may further draw support if the two leaders finalize a framework that could pause higher US tariffs and China’s rare earth export controls.
The Bank of Canada (BoC) is also expected to implement a 25-basis-point rate cut later on Wednesday. However, Canada’s relative rate outlook remains more favorable, as the 2.25% policy rate still provides positive real yields against a 2.4% headline CPI. Analysts believe October’s cut will likely mark the end of the BoC’s easing cycle, with policymakers expected to adopt a neutral-to-hawkish tone amid moderate inflation pressures and a higher unemployment rate.
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.
