USD/CAD holds steady above 1.3750 as calm returns after the rout
|- USD/CAD trades on a flat note near 1.3785 in Wednesday’s early Asian session.
- Markets bet that the Fed will start cutting rates next month with a 50 bps reduction to its policy rate.
- The Canadian employment report on Friday will be closely watched.
The USD/CAD pair trades flat around 1.3785 during the early Asian session on Wednesday. The US Dollar (USD) rebounds as some calm returns to the markets, which helps limit the pair’s losses. Later in the day, the Canadian July Ivey Purchasing Managers Index (PMI) and EIA US crude oil inventories report will be released.
The markets rebound following the sharp sell-off earlier this week. Chicago Federal Reserve President Austan Goolsbee on Monday warned against taking too much of a signal from the market sell-off, adding that it was prompted by the Bank of Japan's (BoJ) rate decision last week and rising Middle East geopolitical tensions. However, traders expect the US Federal Reserve (Fed) to take some action before it misses the chance after a disappointing US employment report for July.
Joseph LaVorgna, chief US economist at SMBC Nikko Securities, expects the Fed to cut interest rates by 3 full percentage points by the end of 2025, more aggressive than the current market outlook. Meanwhile, financial markets have priced in 69.5% odds of a 50 basis points Fed rate cut in September, down from 85% on Monday, according to the CME FedWatch tool.
On the Loonie front, traders will closely monitor the Canadian employment data, which is due on Friday. The Canadian economy is expected to add 22.5K jobs in July, while the Unemployment Rate is projected to rise to 6.5% in the same report period from 6.4% in June.
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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