The USD/CAD currency pair experienced a slight decline on Thursday, despite positive economic data from the United States. After reaching a seven-month high of approximately 1.4140 earlier in the week, the pair settled around 1.4100 during Asian trading hours. The weakening of the US Dollar during this period may be attributed to an easing of expectations regarding a December interest rate cut by the Federal Reserve, despite the release of stronger-than-expected economic indicators.
The US economy demonstrated resilience with a significant rise in employment and a boost in service sector activity. Specifically, the ADP Employment Change indicated a gain of 42,000 jobs in October, contrasting sharply with the previous month’s decline. Moreover, the ISM Services PMI climbed to 52.4, signaling expansion in the services industry and surpassing forecasts. These developments suggest a steady economic environment, yet market sentiment remains cautious, with traders adjusting their expectations for Fed policy moves accordingly.
Market expectations for a potential rate cut have recently diminished, with Fed funds futures indicating a 62% probability of a cut in December, down from 68%. Federal Reserve officials have signaled a careful approach, emphasizing the need to assess further economic data amidst ongoing uncertainties, including the US government shutdown. While some policymakers suggest that a December rate cut remains possible, others advocate a cautious stance until more data becomes available.
Meanwhile, the Canadian dollar received support from domestic fiscal policy actions. The Canadian government announced increased capital spending aimed at supporting infrastructure and economic growth, while successfully maintaining a relatively low budget deficit. This fiscal discipline enhances the capacity of the Bank of Canada to keep interest rates steady at 2.25%. Additionally, Canada’s reliance on oil exports makes the CAD sensitive to movements in crude prices, with higher oil prices generally boosting the currency due to increased export revenue and a favorable trade balance.
Overall, the Canadian dollar’s movements are driven by a complex interplay of monetary policy, commodity prices, economic indicators, and trade dynamics, with recent fiscal measures contributing positively to its outlook amid prevailing market uncertainties.
