- USD/CAD extends its winning streak as traders expect the Fed to keep interest rates steady in January.
- US Nonfarm Payrolls increased by 256K in December, exceeding expected 160K and November’s figure of 212K.
- The downside of the commodity-linked CAD could be restrained due to higher Oil prices.
USD/CAD continues to gain ground for the fifth successive day, trading around 1.4440 during the European hours on Monday. However, the USD/CAD pair appreciated as the US Dollar (USD) strengthened as the robust US labor market data for December will likely reinforce the US Federal Reserve’s (Fed) stance to keep interest rates steady in January.
The US Dollar Index (DXY), which tracks the US Dollar’s (USD) performance against six major currencies, reached to 109.98, the highest level since November 2022, during the Asian hours on Monday. Additionally, higher yields are contributing support for the Greenback, with 2-year and 10-year US Treasury bond yields standing at 4.41% and 4.79%, respectively, at the time of writing.
Data from the US Bureau of Labor Statistics (BLS), released on Friday, reported that Nonfarm Payrolls (NFP) increased by 256K in December, significantly exceeding market expectations of 160K and surpassing the revised November figure of 212K (previously reported as 227K). Moreover, the US Unemployment Rate edged down to 4.1% in December from 4.2% in November. However, annual wage inflation, measured by the change in Average Hourly Earnings, dipped slightly to 3.9% from 4% in the prior reading.
Additionally, the risk-sensitive Canadian Dollar (CAD) faces downward pressure amid growing concerns over President-elect Donald Trump’s promises to impose tariffs on imports. “We are assuming that Trump implements tariffs on Canada this year, which is likely to weigh on the loonie,” said Stephen Brown, Deputy Chief North America Economist at Capital Economics. On Sunday, Canadian Prime Minister Justin Trudeau stated that while the government is not seeking a trade war with the new administration, it will have to respond if the US imposes tariffs on Canadian goods.
However, the commodity-linked CAD may limit its losses as rising Oil prices provide support, given Canada’s position as the largest Oil exporter to the United States (US). West Texas Intermediate (WTI) extends its rally for the third consecutive session, trading near $77.00 per barrel, just below the $77.46 mark reached on Monday, the highest level since October 8. Crude Oil prices continue to rise amid heightened concerns over potential supply disruptions driven by new US sanctions on Russia’s Oil industry.
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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