Canadian Dollar strengthens as risk-on mood weighs on US Dollar
USD/CAD extends its losses for the second successive day, trading around 1.4210 during Asian hours on Friday.
The Canadian Dollar (CAD) exhibited strength on Friday as markets embraced a risk-on sentiment, causing the US Dollar (USD) to lose demand. This shift was observed following remarks from US President Donald Trump on social media, where he announced productive talks with Iran and refrained from attacking the country prior to the midterm elections. The US Dollar's safe-haven appeal waned, leading to the USD/CAD pair trading around 1.4210 during Asian trading hours.
Market expectations of a 17.7% probability of a 25 basis points (bps) interest rate hike by the Federal Reserve, down from 38% a week prior, were influenced by the Fed's slightly more hawkish stance from its member, Musalem. His comments on AI-related investment, strong capital demand, and an unsustainable fiscal path suggested persistent demand-driven inflation and a higher-for-longer rate environment, even though Musalem maintained an open mind going into meetings.
The Fed Sentiment Index dipped by 0.25 points to 138.33, indicating a slight pullback in hawkishness despite a still-strong tightening bias.
The Bank of Canada's (BoC) key factors influencing the CAD include interest rates, oil prices, economic health, inflation, and the trade balance. Lower oil prices, as hinted at by Trump's remarks, could restrain the USD/CAD pair. Nonetheless, the CAD's trajectory appears to be consolidating, awaiting reassessment after the recent depreciation. The Bank of Canada's primary objective is to maintain inflation at 1-3% by adjusting interest rates, with higher rates typically supporting the CAD and attracting capital inflows.
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