Canadian Dollar remains steady as hawkish Fed bets keep US Dollar stable

The Canadian Dollar (CAD) remained relatively stable at around 1.4250 during Thursday's Asian trading session, despite posting two consecutive days of gains earlier in the week. Despite the temporary pause, the pair could potentially resume its upward trajectory as the US Dollar (USD) may benefit from an increasingly hawkish Federal Reserve (Fed) outlook.

Following the release of hotter-than-expected US Consumer Price Index (CPI) inflation data, traders have increased their expectations for a December rate hike, particularly following remarks by Fed Governor Christopher Waller suggesting support for a quarter-point increase, or even a larger half-point move if inflation continues to worsen.

Markets are now pricing in an 87% probability of a December rate hike, with a nearly 13% chance of a 50 basis point increase. TD Securities predicts that the USD has the potential to continue advancing against select major currencies, including the CAD and KRW, due to diverging employment data releases. Lower unemployment rates and rising wage growth in Canada suggest that the case for tighter policy in the Bank of Canada (BoC) is weakening, making the CAD vulnerable.

Additionally, the USD/CAD pair may experience further appreciation as the commodity-linked CAD faces headwinds from falling crude oil prices. Oil prices have declined due to reduced tensions between the US and Iran and expanding supply, with OPEC+'s October production reaching 41.23 million barrels per day, mainly due to higher output from Saudi Arabia.

The Bank of Canada's potential rate hike and Canada's inflation rate of 3.1% in September, marking the highest level since May, provide some support for the CAD. However, the victory of the Democratic Party in the US mid-term elections may help alleviate trade pressures on Canadian economic growth. Key factors influencing the CAD include the Bank of Canada's interest rates, crude oil prices, the health of the Canadian economy, inflation, and the trade balance.

The Bank of Canada's interest rate decisions impact the entire financial system, while the price of oil, being Canada's largest export, directly affects the CAD's value. Higher oil prices generally increase demand for the CAD, while falling oil prices have the opposite effect. Macroeconomic data releases, such as GDP, manufacturing and services PMIs, employment, and consumer sentiment, also play a crucial role in determining the CAD's direction.

A strong Canadian economy is beneficial for the Canadian Dollar, as it attracts foreign investment and may prompt the Bank of Canada to raise interest rates, strengthening the currency. Conversely, weak economic data can lead to a decline in the CAD.