USD/CAD returns above 1.3900 as US Dollar strengthens across the board

• USD/CAD bounces back above 1.3900 as Trump's victory strengthens the US Dollar.
• Investors expect the Fed to cut interest rates by 25 bps to 4.50%-4.75%.
• The BoC delivered a bigger rate cut due to slowing inflation and weak labor demand.

The USD/CAD pair recovers Tuesday's sell-off and returns above the key figure of 1.3900 in North American trading hours on Wednesday. The Loonie pair strengthens as the US Dollar (USD) looks set to register highest gains in single trading day in more than four years. The US Dollar Index (DXY), which discovers Greenback's value against six major currencies, posts a fresh four-month high near 105.40.

The USD Index surges as citizens of the United State (US) have elected Republican Donald Trump as their 47th President. Trump beat his Democratic rival Kamala Harris in key battleground states takes by Senate. Risk-perceived currencies have been hit hard by Trump's victory as investors expect higher import tariffs and lower corporate taxes in his administration. The scenario looks favorable for the US Dollar as it will boost corporate investment and labor demand.

Going forward, investors will focus to the Federal Reserve's (Fed) monetary policy decision, which is scheduled for Thursday. Traders have priced in an interest rate reduction by 25 basis points (bps) to 4.50%-4.75%, according to the CME FedWatch tool. This would be the second interest rate cut of this year. In September, the Fed started the policy-easing cycle, however, the rate-cut size was 50 bps. Investors will also pay attention to the impact of Trump victory on the inflation outlook and the interest rate path.

Though the Canadian Dollar (CAD) is weak against the US Dollar, it is performing strongly against other currencies even though the Bank of Canada (BoC) is expected to cut interest rates further. The BoC minutes for the October meeting in which the central bank cut interest rates by a larger-than-usual size of 50 bps showed that policymakers are confident that the disinflationary trend is intact and labor demand is weak.

"Members felt that a larger step was appropriate given the ongoing softness in the labor market and the need for stronger economic growth to absorb excess supply," it said.