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24 Dec 2024
USD/CAD edges higher to near 1.4400 as Fed policymakers signal fewer rate cuts next year
- USD/CAD appreciates as its upside potential is strengthened by the slightly hawkish sentiment surrounding the Fed’s policy outlook.
- The US Consumer Confidence Index fell by 8.1 points in December, landing at 104.7.
- Canada’s Gross Domestic Product expanded by 0.3% MoM in October, exceeding the forecasted 0.1% decline.
USD/CAD holds thin gains after three days of losses, trading around 1.4380 during the Asian hours on Tuesday. The upside potential for the USD/CAD pair is bolstered as Federal Reserve (Fed) policymakers signaled fewer interest rate cuts next year due to a slowdown in the disinflation process. However, soft US PCE data have tempered inflation concerns, presenting a mixed outlook for the economy.
On the data front, US Durable Goods Orders for November were weaker than anticipated, declining by 1.1% compared to the expected 0.4% drop. This follows an upward revision for October, which showed an increase of 0.8%, up from the previously reported 0.2%.
The US Consumer Confidence Index, published by the Conference Board, fell by 8.1 points in December, landing at 104.7. “The recent rebound in consumer confidence was not sustained in December as the Index dropped back to the middle of the range that has prevailed over the past two years,” noted Dana M. Peterson, Chief Economist at The Conference Board.
US households expressed concerns about President-elect Trump’s economic policies, with nearly half of respondents fearing that tariffs could drive up the cost of living. These concerns were compounded by the Federal Open Market Committee’s (FOMC) recent projections, which indicated fewer rate cuts in 2025, reflecting caution amid persistent inflationary pressures.
In Canada, Gross Domestic Product (GDP) rose by 0.3% month-over-month in October, exceeding the forecasted 0.1% decline. However, the Raw Material Price Index in Canada contracted by 0.5% in November, a sharp drop from the 4.0% increase recorded in October and well below the anticipated 0.6% rise.
Looking ahead, Canada’s GDP is expected to have contracted by 0.1% month-over-month in November, marking the first monthly contraction of the year and aligning with the central bank’s recent warnings and downwardly revised growth projections.
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.