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10 Jan 2025
USD/CAD rises above 1.4400 as US Dollar Index rallies toward two-year highs
- USD/CAD appreciates as US Dollar Index advances toward two-year highs ahead of labor market figures.
- The US NFP is expected to decrease to 160K in December, down from the previous 227K.
- Statistics Canada could report a Net Change in Employment of 25,000 for December, as compared to November’s figure of 50,500.
USD/CAD continues its winning streak for the fourth successive session, trading around 1.4420 during the Asian hours on Friday. The USD/CAD pair appreciates as the US Dollar (USD) receives support from hawkish Federal Open Market Committee (FOMC) Meeting Minutes and uncertainties surrounding tariff plans proposed by the incoming Trump administration.
The US Dollar Index (DXY), which measures the USD’s performance against six key currencies, trades near 109.30 at the time of writing, just below its two-year high of 109.56 reached on January 2. The Greenback gains strength as long-term US bond yields continue to rise due to significant supply. As of now, the 10-year yield is at 4.69%, while the 30-year yield stands at 4.93%.
Kansas Fed President Jeffrey Schmid made headlines on Thursday, emphasizing the need to reduce the Fed's balance sheet, suggesting that interest rate policy is approaching its long-term equilibrium. He noted that any future rate cuts should be gradual and guided by economic data.
Additionally, Federal Reserve Board of Governors member Michelle Bowman added her voice to a chorus of Fed speakers this week as policymakers work double-duty to try and smooth over market reactions to a much tighter pace of rate cuts in 2025 than many market participants had previously anticipated.
Canadian Prime Minister Justin Trudeau said Thursday that he would respond if Trump does impose tariffs. Trudeau further stated that President-elect Donald Trump’s threat of slapping a 25% tariff on Canadian products would ultimately hurt American consumers and businesses. Canada, Mexico, and China are the US’s biggest trade partners.
Meanwhile, higher crude Oil prices may help limit the Canadian Dollar's (CAD) losses, as Canada remains the largest Oil exporter to the United States (US). At the time of writing, West Texas Intermediate (WTI) Oil price holds steady after recent gains, trading around $73.70 per barrel.
Crude Oil prices are supported by expectations of increased heating fuel consumption due to prolonged colder temperatures across the Northern Hemisphere. Additionally, signs of strong demand are evident, highlighted by a report indicating a seventh consecutive weekly decline in US crude stockpiles.
On the data front, traders are now focused on US labor market figures, particularly Nonfarm Payrolls (NFP), for clues on the Fed’s future policy direction. In Canada, attention will turn to December's Net Change in Employment and Unemployment Rate for further economic insights.
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.