Forex News
- USD/JPY attracts sellers for the second straight day amid a combination of negative factors.
- Hot Tokyo CPI and the BoJ’s hawkish outlook reaffirm December hike bets, boosting the JPY.
- Iran diplomacy hopes and falling US bond yields exert pressure on the USD and spot prices.
The USD/JPY pair drifts lower for the third straight day on Friday, sliding further below mid-157.00s during the Asian session following the highly anticipated Bank of Japan (BoJ) decision.
As was expected, the BoJ held its policy rate unchanged at 1.25% in an 8-1 vote, with Takata dissenting in favour of a hike. In the accompanying statement, the central bank noted that the core inflation is likely to stay near levels consistent with price target and risk to prices remain tilted toward upside. This comes on top of a hot Tokyo CPI report released earlier today and reaffirms market expectations for an imminent rate hike in December, providing a modest lift to the Japanese Yen (JPY) and weighing on the USD/JPY pair.
Meanwhile, the US Dollar (USD) selling remains unabated amid hopes for a diplomatic resolution to end the US-Iran war. Moreover, declining US bond yields narrow the US-Japan rate differential, lending additional support to the lower-yielding JPY and contributing to the offered tone surrounding the Greenback. This backs the case for a further depreciating move for the USD/JPY pair, though bears opt to wait for BoJ Governor Kazuo Ueda's comments during the post-meeting press conference before placing fresh bets.
Economic Indicator
BoJ Press Conference
The Bank of Japan (BoJ) holds a press conference at the end of each one of its eight scheduled policy meetings. At the press conference the Governor of the BoJ communicates with media representatives and investors regarding monetary policy. The Governor talks about the factors that affect the most recent interest rate decision, the overall economic outlook, inflation, and clues regarding future monetary policy. Hawkish comments tend to boost the Japanese Yen (JPY), while a dovish message tends to weaken it.
Read more.Next release: Fri Oct 30, 2026 06:30
Frequency: Irregular
Consensus: -
Previous: -
Source: Bank of Japan
- The British Pound has not faced a significant reaction against the Japanese Yen after BoJ’s policy decision.
- The BoJ leaves interest rates steady at 1.25%, with an 8-1 majority.
- Investors expect the BoE to hike interest rates to 4% next week.
The British Pound (GBP) remains almost stable against the Japanese Yen (JPY) at around 210.80 after the Bank of Japan’s (BoJ) monetary policy announcement.
The BoJ has left interest rates steady at 1.25%, with an 8-1 majority. BoJ board member Hajime Takata dissented the decision and voted in favor of a rate hike by 25 basis points (bps) to 1.50%.
In the September meeting, the BoJ hiked policy rates by 25 bps in the September meeting.
The BoJ was expected to leave policy rates unchanged as Governor Kazuo Ueda warned against quick monetary tightening in the September policy.
Analysts at Brown Brothers Harriman (BBH) said in a note that the BoJ is "widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again." They highlight Governor Kazuo Ueda’s cautious tone, recalling that "in September, BoJ Governor Kazuo Ueda warned that rapid rate hikes could unsettle asset prices, adding that it could take some time to confirm that 2% inflation is entrenched."
Meanwhile, investors await BoJ Governor Ueda’s press conference for fresh cues on the monetary policy outlook. Commerzbank said before the policy decision that “markets currently price an around 80% probability of a rate hike in December”.
On the United Kingdom (UK) front, financial markets shift their focus to the Bank of England’s (BoE) monetary policy announcement next week.
What to expect from BoE?
Strategists at Societe Generale argued that a BoE rate increase is effectively “nailed on in November,” pointing to a “brace of upside surprises for CPI and PPI output price inflation, and firmer wage data” as key drivers. They warn that this combination will “alert the MPC to the budding risk of second round effects” and “will almost certainly trigger a hawkish response on interest rates” at the next policy meeting on November 5.
Economic Indicator
BoJ Governor Ueda speech
Kazuo Ueda is the Governor of the Bank of Japan, he replaced Haruhiko Kuroda on April 2023. Before being appointed, Ueda was an economics professor at the University of Tokyo and held a PhD from the Massachusetts Institute of Technology. Mr. Ueda is the first academic economist to run the bank in post-war Japan, breaking with the tradition that the governor is drawn from the BoJ or finance ministry.
Read more.Next release: Fri Nov 06, 2026 16:00
Frequency: Irregular
Consensus: -
Previous: -
Source: Bank of Japan
- AUD/JPY holds losses as the Japanese Yen remains stronger following the BoJ policy decision.
- The BoJ decided to keep policy rate unchanged at 1.25%, as expected.
- AS of October 29, ASX futures indicated an 80% chance of an RBA rate hike to 4.85%.
AUD/JPY loses ground for the second consecutive day, trading around 110.80 during Asian hours on Friday. The currency cross holds losses as the Japanese Yen (JPY) remains stronger after the Bank of Japan (BoJ) board members decided to leave the short-term interest rate unchanged at 1.25% following the conclusion of its two-day monetary policy review meeting.
The downside of the AUD/JPY cross could be restrained as the Australian Dollar (AUD) receives support from expectations of further policy tightening by the Reserve Bank of Australia (RBA). Hotter-than-expected inflation data and hawkish comments from RBA officials have led markets to increasingly price in a rate hike at the central bank's upcoming November 3 meeting.
As of October 29, the ASX 30-day interbank cash rate futures November 2026 contract was trading at 95.22, signaling an 80% probability of an interest rate increase to 4.85% at the next RBA Board meeting.
RBA seen delivering one last hike as TD Securities flags firmer inflation
According to TD Securities, the firmer third-quarter CPI print has reinforced expectations that the RBA will move again next week. The bank now anticipates that the central bank will "lift the cash rate 25bps at next week's meeting to 4.85%," arguing that the stronger inflation outcome "validates the Bank's decision to hike last month" and that "likely forecast upgrades to the Bank's inflation track in the November Statement on Monetary Policy likely justify a follow-up 25bps hike next week." TD Securities adds that this "hike should mark the last in the cycle," suggesting the tightening phase is nearing its end.
Economic Indicator
BoJ Interest Rate Decision
The Bank of Japan (BoJ) announces its interest rate decision after each of the Bank’s eight scheduled annual meetings. Generally, if the BoJ is hawkish about the inflationary outlook of the economy and raises interest rates it is bullish for the Japanese Yen (JPY). Likewise, if the BoJ has a dovish view on the Japanese economy and keeps interest rates unchanged, or cuts them, it is usually bearish for JPY.
Read more.Last release: Fri Oct 30, 2026 03:00
Frequency: Irregular
Actual: 1.25%
Consensus: 1.25%
Previous: 1.25%
Source: Bank of Japan
- AUD/USD gains ground to near 0.7035 in Friday’s Asian session.
- Australia’s hotter-than-expected inflation and hawkish remarks from the RBA have boosted expectations of rate hike.
- Fed held steady on rates at the conclusion of its October meeting, maintaining its target range of 3.75% to 4.00%.
The AUD/USD pair gathers strength to near 0.7035 during the Asian trading hours on Friday. The Australian Dollar (AUD) edges higher against the US Dollar (USD) as hotter Australian CPI inflation data has bolstered expectations of Reserve Bank of Australia (RBA) rate hikes.
The Australian Consumer Price Index (CPI) inflation rose to 4.3% YoY in September from 4.0% in August, the Australian Bureau of Statistics showed on Wednesday. This figure came in above the market consensus of 4.2%. RBA Governor Michele Bullock said that the price pressures the RBA had been worried about were starting to emerge.
This report has boosted the case for the RBA rate hike in the upcoming meeting next Tuesday and support the Aussie. Markets are now pricing in nearly a 80% chance of an interest rate increase to 4.85% at the next RBA Board meeting, up from 62% before the data was released, according to the ASX RBA Rate Tracker.
On Wednesday, the US Federal Reserve (Fed) decided to leave its benchmark federal funds rate unchanged in a range of 3.75% to 4%. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, preferring to hike rates by 25 basis points (bps).
Policymakers stated that they hoped incoming data would help inform their next decision. Traders are pricing in a 74.9% probability of a hike in December, according to the CME FedWatch tool.
Australia inflation surprise bolsters RBA hike bets and supports the Aussie
Strategists at Brown Brothers Harriman note that the latest Australia inflation data “beat expectations, strengthening the case for another RBA hike and underpinning AUD.” September headline CPI rose “4.3% y/y (consensus: 4.2%) vs. 4.0% in August reflecting rising housing and transport costs,” leaving price pressures running hotter than the central bank had anticipated.
BBH highlights that “inflation is materially worse than the RBA assessed in August, when it forecast year-end headline CPI at 3.6% and trimmed mean at 3.3%.” In their view, “this argues for additional tightening,” with RBA cash rate futures having “raised odds of a 25bps hike to 4.85% on November 3 from 60% to 85%, and increased bets on another hike in Q1.”
On the core measures, BBH points out that “trimmed mean CPI matched consensus at 3.6% y/y up from 3.5% in August.” More importantly for policy, “the policy-relevant Q3 trimmed mean CPI ran hot at 3.7% y/y (consensus: 3.6%) vs. 3.6% in Q2,” reinforcing the view that underlying inflation remains uncomfortably elevated for the RBA.
Warsh doubles down on price stability pledge, keeping Dollar bulls engaged
Warsh’s press conference tone is firmly consistent with the established baseline, with the FXS Speechtracker score at 7/10 matching the historical average and underscoring a steady hawkish stance. The key remark that “ensuring price stability is not about a fixed date on a calendar” reinforces a data-dependent, outcome-focused approach, while repeated references to “new monetary medicine,” removal of accommodation, and confidence in inflation expectations signal ongoing commitment to quashing inflation rather than pre-committing to a rapid pivot. Emphasis on a hard 2% PCE target, rejection of a “soft” inflation goal, and acknowledgement that interest rates are tightening financial conditions and affecting new technology and CAPEX all support a narrative of persistent policy resolve that is broadly supportive for the Dollar.
The FXS Fed Sentiment Index jumped by +14.39 points to 141.89, pushing sentiment deeper into hawkish territory and aligning with the unchanged 7/10 FXS Speechtracker score. With the index far above the neutral 100 line, the combination of a firm 2% price stability pledge and recognition that “monetary medicine is starting to work” suggests markets should continue to price a relatively restrictive Fed path, a backdrop that tends to underpin the Dollar against the Euro and Yen.
Technical Analysis: AUD/USD keeps a modest bullish outlook in the near term
In the daily chart, AUD/USD holds a modest bullish bias as price sits above the 100-day simple moving average (SMA) and the Bollinger middle band, suggesting the recent rebound is supported by underlying demand. The Relative Strength Index (RSI) at 53.4 has shifted into neutral-to-positive territory, hinting that buyers retain the upper hand without yet pushing the pair into overbought conditions.
On the topside, immediate resistance is located at the upper Bollinger band around 0.7065, where a sustained break would open the door to a more extended recovery. On the downside, initial support is seen at the 100-day SMA at 0.7035, followed by the Bollinger middle band near 0.6995; a deeper pullback toward the lower Bollinger band at 0.6925 would likely attract fresh buying interest while keeping the broader constructive tone intact.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
- DXY declines as easing Middle East tensions lower safe-haven demand and reduce December Fed rate-hike probabilities.
- US-Iran peace talks steady crude oil prices, helping dampen immediate inflation concerns.
- Robust US GDP and tight labor market data limit Dollar losses by demonstrating economic resilience.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground for the third successive day and trading near 101.70 during Asian hours on Friday.
The Greenback faces pressure on easing safe-haven demand amid hopes for US-led diplomatic peace talks. Easing Middle East tensions have helped offset oil supply and inflationary concerns, dampening expectations for a Federal Reserve (Fed) rate hike at its December meeting. CME FedWatch Tool suggests that traders are now pricing in a nearly 75% chance of a 25-basis-point rate increase, down from 84.2% a day prior.
Crude oil prices held steady following a Wall Street Journal report disclosing that US Vice President JD Vance reached out on Wednesday to Mohsen Rezaei, Secretary of Iran's Supreme National Security Council, in an effort to restart peace talks. US President Donald Trump confirmed he approved Vance's diplomatic outreach, adding that Iran needs assistance with medical supplies and other essential resources.
However, recent US economic data highlights continued resilience and increased Fed rate hike bets. Preliminary Gross Domestic Product printed at 3.4% YoY, beating expectations of 3.2% and rising from Q2's 2.2% reading, driven by strong consumer spending at 3.8% YoY.
Furthermore, the Fed’s preferred inflation metric, the Core PCE Price Index, rose 3.1% YoY in line with expectations, while initial jobless claims dipped slightly to 194K, reinforcing signs of a heating economy and a tight labor market.
Technical Analysis:
In the daily chart, Dollar Index Spot trades at 101.70. Price holds above the 50-day Exponential Moving Average (EMA) but remains capped by the nine-day EMA, keeping the near-term tone neutral after the recent pullback from the highs. The 14-day Relative Strength Index (RSI) has eased to 51.47, hinting at consolidative momentum rather than a clear directional push, while the FXS Fed Sentiment Index at 141.89 suggests elevated policy-related uncertainty that could limit sustained trending moves.
On the topside, immediate resistance is located at the 9-day EMA at 101.93, and a decisive break above this barrier would open the way for a retest of recent peaks. On the downside, initial support is seen at the 50-day EMA at 101.21, with a daily close below this level likely to shift the bias back toward a more bearish configuration as the index would start sliding beneath its medium-term trend base.
Treasury curve steepening seen as supportive for broader USD tone
Strategists at Scotiabank highlight that recent “price action in the Treasury curve was notable,” with Chair Warsh’s remarks ultimately delivering “a meaningful steepening in 2s-10s – a powerful signal for growth.” They describe the move as “a welcome move away from inversion,” stressing that it is one “that carries clear implications for the USD more broadly,” as investors reassess the growth outlook and the currency’s underlying support.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
- Silver attracts sellers for the third straight day and drops to a fresh YTD low on Friday.
- The bearish technical setup backs the case for an extension of the downward trend.
- The RSI is flashing oversold conditions, pointing to the risk of a corrective rebound.
Silver (XAG/USD) extends its descending trend for the third straight day, hitting a fresh low since November 2025 during the Asian session on Friday. The white metal, however, recovers slightly from the $51.00 neighborhood and currently trades near the $51.50-$51.55 region, still down around 1.25% for the day.
From a technical perspective, the decline witnessed over the past month or so has been along a downward parallel channel, which points to a well-established bearish trend. Moreover, momentum indicators hint that sellers have the upper hand despite the risk of short-term corrective bounces amid overstretched conditions.
In fact, the Relative Strength Index (RSI) at 27.21 sits in oversold territory, and the Moving Average Convergence Divergence (MACD) remains negative. Hence, any attempted recovery back above the $52.00 mark is likely to attract fresh sellers near the $52.50-$52.55 region, which, in turn, should cap the XAG/USD near $53.00.
A sustained strength beyond the latter could prompt some follow-through short-covering move, which should allow the white metal to surpass $54.00 and test the channel top near $54.52. This is followed by the 50-period SMA at $54.76. The XAG/USD would need to reclaim that to open the door to a more sustained recovery.
On the downside, a break below $51.00 would make the commodity vulnerable to accelerating the fall towards the $50.00 psychological mark and expose the lower boundary of the channel at $49.07, which forms a more meaningful floor. A sustained break beneath should pave the way toward deeper downside levels.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
XAG/USD 4-hour chart
Silver FAQs
Silver is a precious metal highly traded among investors. It has been historically used as a store of value and a medium of exchange. Although less popular than Gold, traders may turn to Silver to diversify their investment portfolio, for its intrinsic value or as a potential hedge during high-inflation periods. Investors can buy physical Silver, in coins or in bars, or trade it through vehicles such as Exchange Traded Funds, which track its price on international markets.
Silver prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can make Silver price escalate due to its safe-haven status, although to a lesser extent than Gold's. As a yieldless asset, Silver tends to rise with lower interest rates. Its moves also depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAG/USD). A strong Dollar tends to keep the price of Silver at bay, whereas a weaker Dollar is likely to propel prices up. Other factors such as investment demand, mining supply – Silver is much more abundant than Gold – and recycling rates can also affect prices.
Silver is widely used in industry, particularly in sectors such as electronics or solar energy, as it has one of the highest electric conductivity of all metals – more than Copper and Gold. A surge in demand can increase prices, while a decline tends to lower them. Dynamics in the US, Chinese and Indian economies can also contribute to price swings: for the US and particularly China, their big industrial sectors use Silver in various processes; in India, consumers’ demand for the precious metal for jewellery also plays a key role in setting prices.
Silver prices tend to follow Gold's moves. When Gold prices rise, Silver typically follows suit, as their status as safe-haven assets is similar. The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, may help to determine the relative valuation between both metals. Some investors may consider a high ratio as an indicator that Silver is undervalued, or Gold is overvalued. On the contrary, a low ratio might suggest that Gold is undervalued relative to Silver.
- USD/CAD moved lower despite easing Middle East tensions pressuring oil and the Canadian Dollar.
- US Dollar struggles amid easing safe-haven demand due to Middle East tension relief.
- Strong US GDP and labor data limit deeper USD losses despite falling Fed hike probabilities.
USD/CAD loses ground for the third consecutive day, trading around 1.3970 during Asian hours on Friday. The pair depreciates despite renewed Middle East diplomatic efforts easing pressure on oil markets, placing downward pressure on the commodity-linked Canadian Dollar (CAD).
Crude oil prices held steady following a Wall Street Journal report disclosing that US Vice President JD Vance reached out on Wednesday to Mohsen Rezaei, Secretary of Iran's Supreme National Security Council, in an effort to restart peace talks. US President Donald Trump confirmed he approved Vance's diplomatic outreach, adding that Iran needs assistance with medical supplies and other essential resources.
The US Dollar (USD) faces pressure on easing safe-haven demand amid hopes for US-led diplomatic peace talks. Easing Middle East tensions have helped offset oil supply and inflationary concerns, dampening expectations for a Federal Reserve (Fed) rate hike at its December meeting. Traders are now pricing in a nearly 75% chance of a 25-basis-point rate increase, down from 84.2% a day prior.
However, recent US economic data highlights continued resilience and increased Fed rate hike bets. Preliminary Gross Domestic Product printed at 3.4% YoY, beating expectations of 3.2% and rising from Q2's 2.2% reading, driven by strong consumer spending at 3.8% YoY. Furthermore, the Fed’s preferred inflation metric, the Core PCE Price Index, rose 3.1% YoY in line with expectations, while initial jobless claims dipped slightly to 194K, reinforcing signs of a heating economy and a tight labor market.
Technical Analysis:
In the daily chart, USD/CAD trades at 1.3970, holding a bearish near-term bias as it remains below the nine- and 50-day Exponential Moving Averages (EMAs). The pair has retreated from recent highs and now trades under this short-term and medium-term moving average cluster, suggesting upside is capped for the moment, while the 14-day Relative Strength Index (RSI) at 36 leans toward weak momentum rather than outright oversold conditions.
On the topside, immediate resistance is located at the nine-day EMA at 1.4027, followed by the fifty-day EMA at 1.4057, with a more significant barrier at the horizontal level near 1.4300. On the downside, initial support appears at the 1.3732 horizontal floor, ahead of a deeper structural level at 1.3482, where buyers would be expected to show stronger interest if the current decline extends.
BoC hike seen as modestly hawkish, nudging rate expectations higher
Strategists at Scotiabank note that the Bank of Canada’s mid-week move was not only about the decision itself but also about the tone accompanying it. They highlight that the BoC’s hike on Wednesday was “delivered with a modestly hawkish message” which, in their view, “ultimately delivered a slight boost in rate expectations across the curve,” reinforcing support for the Canadian Dollar against its commodity peers.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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