USD/CAD extends downside near 1.3750, US Initial Jobless Claims and geopolitical risks eyed
|- USD/CAD trades on a softer note around 1.3755 in Thursday’s early Asian session.
- BoC’s governing council saw the risk that consumer spending could be significantly weaker than expected in 2025 and 2026.
- Traders will watch the weekly US Initial Jobless Claims on Thursday for some hints about the employment market outlook.
The USD/CAD pair extends its decline to near 1.3755 during the early Asian session on Thursday. The Canadian Dollar (CAD) is poised to perform well this week despite the lack of top-tier economic data released earlier this week. On Friday, traders will closely monitor the Canadian employment report for July.
The Bank of Canada (BoC) minutes from a recent meeting released Wednesday showed that members saw a risk that consumer spending would be much weaker than expected in 2025 and 2026. The minutes observed that labour market pressures had eased and that the economy was evolving largely as expected, although job creation has been slower in the working-age population.
According to the deliberations, some members were more focused on the downside risks to inflation posed by a weak economy and restrictive monetary policy, while others emphasized the upside risks of wage growth and the possibility of a housing market rebound.
The Canadian employment data will be published on Friday. The Canadian economy is expected to add 22.5K jobs in July, while the Unemployment Rate is estimated to rise to 6.5% in the same report period from 6.4% in June.
Meanwhile, the rising geopolitical tensions in the Middle East and another fall in US weekly crude oil inventories boost crude oil prices and lift the commodity-linked Loonie. It's worth noting that higher oil prices generally support the CAD lower as Canada is the leading exporter of Oil to the United States (US).
On the USD’s front, investors expect the Federal Reserve (Fed) to take more aggressive action for the interest rate before it misses the chance. Markets are pricing in a strong likelihood of that half-point rate cut in September. The expectation of deeper rate cuts might cap the upside for the US Dollar in the near term.
Traders will keep an eye on the weekly US Initial Jobless Claims on Thursday. TD Securities analysts said, “Jobless claims on Thursday is something markets will be looking for confirmation of slowing economic numbers, particularly employment.”
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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