USD/CAD may experience an increase as stronger US inflation data and assertive remarks from the Federal Reserve enhance expectations for a rate hike in December. Declining crude oil prices, driven by increasing OPEC+ production and a reduction in US-Iran tensions, exert pressure on the Canadian Dollar. Rising Canadian inflation at 3.1% enhances expectations for a Bank of Canada rate hike, alleviating some of the downward pressure on the CAD. USD/CAD remains stable at approximately 1.4250 in Thursday’s Asian trading session, following two consecutive days of increases. Despite the pause, the pair could resume its upward climb as the US Dollar may draw strength from an increasingly hawkish Federal Reserve policy outlook.
In light of the recent US Consumer Price Index inflation data, which exceeded expectations, market participants have intensified their expectations for a rate hike in December. This sentiment has been further bolstered by remarks from Fed Governor Christopher Waller, who indicated earlier this week his support for a quarter-point increase, or potentially a half-point adjustment should inflation conditions deteriorate. According to the CME FedWatch Tool, markets are currently assigning approximately an 87% probability to a December rate hike, while also indicating a nearly 13% likelihood of a more substantial 50 basis point increase. According to TD Securities, the US Dollar still has scope to advance against select majors, with analysts highlighting that “across global major currencies, we see room for the USD to rally selectively against CAD and KRW in the near-term.”
They argue that “diverging employment data releases will likely keep USDCAD supported above 1.40,” as Canada’s “rising unemployment rate amid falling wage growth rate” undermines the case for tighter policy. In their view, this backdrop “reduces the market pricing of a December BoC rate hike relative to the Fed,” leaving the Canadian Dollar vulnerable while USDCAD remains underpinned at elevated levels. Moreover, the USD/CAD pair may further appreciate as the commodity-linked Canadian Dollar faces headwinds from falling crude oil prices. Oil has retraced as the US and Iran seem to be steering clear of additional escalation, while supply has concurrently increased.
OPEC’s monthly report released on Wednesday indicates that OPEC+ crude production increased by approximately 2.04 million barrels per day in October, reaching a total of 41.23 million barrels per day. This rise was primarily attributed to elevated output from Saudi Arabia. On the domestic front, the CAD is experiencing some underlying support as traders factor in a potential rate hike from the Bank of Canada. Annual inflation in Canada increased to 3.1% in September, up from 3.0% in August, representing the highest level since May’s 3.2%. Meanwhile, the Democratic Party’s victory in the US mid-term elections could potentially alleviate trade pressures impacting Canadian economic growth.
