USD/CAD remains on the defensive below 1.3650 ahead of FOMC Minutes
|- USD/CAD trades in negative territory for the fourth consecutive day near 1.3620 in Wednesday’s Asian session.
- Markets are already expecting a 25 bps rate cut in September, with some anticipating a larger 50 bps cut.
- Canada’s annual CPI inflation rate fell to 2.5% in July, supporting a third straight BoC rate cut.
The USD/CAD pair trades with a bearish bias around 1.3620, the lowest level since July 12, during the early European session on Wednesday. The expectation that the US Federal Reserve (Fed) would start its easing cycle in September continues to weigh on the US Dollar (USD). Investors will monitor the FOMC Minutes on Wednesday for more cues about the Fed’s interest rate plans in the future.
The weakness of the Greenback has been fuelled by Fed rate cut expectations ahead of the key events and dovish comments from Fed officials. Chicago Fed President Austan Goolsbee said earlier this week that the US economy does not show signs of overheating, therefore, Fed officials should be vigilant about keeping the restrictive policy in place longer than necessary. Additionally, Minneapolis Fed President Neel Kashkari said on Monday that it was appropriate to discuss a potential US interest rate cut in September due to concerns about the weakening labor market.
Investors are now pricing in around 67.5% possibility of a 25 basis points (bps) Fed rate cut in its September meeting, while the chance of a 50 basis points rate cut fell to 32.5% from 53.0% a week earlier.
On the other hand, the softer Canadian Consumer Price Index (CPI) inflation reports support the case for another rate cut by the Bank of Canada (BoC). Traders continue to fully price in a 25 basis points (bps) cut in September, while an additional 50 bps of easing is priced in for the final two meetings of the year. This, in turn, might drag the Loonie lower and cap the downside for USD/CAD.
Data released by Statistics Canada on Tuesday revealed that the Canadian CPI inflation eased to 2.5% YoY in July from 2.7% in June, in line with market expectations. The closely watched underlying measure of inflation, BoC Consumer Price Index Core, fell to 1.7% YoY in July, from 1.9% in the previous reading.
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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