The US Dollar to Canadian Dollar exchange rate edged up this week and as of Wednesday is trending in the region of 1.34.
With a little more optimism in US Dollar trade, USD CAD could extend its recent gains and even head towards the highs seen in late-2016.
US Dollar traders have been increasingly focused on Federal Reserve interest rate hike bets in recent weeks. This week has seen March Fed rate hike bets hold above 80%.
Investors now look towards Friday’s US Non-Farm Payroll results from February. If they impress, the US Dollar will surge as traders lock in bets for a March Fed rate hike.
In this scenario, if the Fed were indeed to hike US interest rates in March it could significantly alter the US Dollar outlook in not only the short to mid-term but also likely the long-term.
With US interest rates looking to increase at a faster pace than some analysts previously expected and Canadian interest rates still low, this would lead to a notable increase in USD demand and see the North American currency keep the neighbouring CAD under pressure.
However, the opposite is also true. If Friday’s US employment stats come in well below expectations investors may quickly unravel their March rate hike bets amid expectations that Fed officials will instead take up a cautious tone to defend against uncertainty.
In short, Friday’s US NFP stats have the potential to drastically worsen or improve March Fed rate hike bets, making them the most vital upcoming event for USD traders in general.
The importance of Fed rate hike bets to the global economy (with many traded products and commodities being priced in USD) means this week’s Canadian data is likely to have a very limited effect on USD CAD movement by comparison.
Friday will also see the publication of Canada’s own February employment report, but regardless of whether the jobs figures disappoint or impress they are unlikely to cause significant shifts to Bank of Canada (BOC) interest rate bets.
With investors generally optimistic about the 2017 outlook for Fed interest rate hikes, USD CAD looks to be in for some gains throughout the year regardless even if the Fed only hikes rates once or twice.
The main thing to watch will be how fast and how soon the US rate hikes come. A shift to poorer US data could still delay the hikes or put them off entirely, as was the case in 2016.
At the time of writing, the US Dollar to Canadian Dollar exchange rate trended in the region of 1.3434. The Canadian Dollar to US Dollar exchange rate traded at around 0.74.
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