- USD/CAD weakens near 1.3805 in Tuesday’s early Asian session.
- Fears of a looming US recession might trigger the Fed to cut interest rates more aggressively this year.
- Lower crude oil prices might weigh on the Loonie and cap the pair’s downside.
The USD/CAD pair trades on a softer note around 1.3805 during the early Asian session on Tuesday. The US Dollar (USD) bounces off the YTD lows near the 102.00 level and hovers around 102.60 amid fears of a US recession.
A risk sentiment would continue to influence the markets as investors are concerned about the recession in the US economy, which triggered a sell-off among the major stock market indices. Market players are now betting the US Federal Reserve (Fed) to act more aggressively in monetary policy this year.
The Fed is expected to cut its interest rate by 50 basis points (bps) in both September and November and another quarter-point cut in December. According to the CME FedWatch tool, the chance for a 50 bps Fed rate cut at the September meeting is 85%.
On Monday, Chicago Fed President Austan Goolsbee said that the US central bank would respond if economic or financial conditions deteriorate. "We're forward-looking about it, and so if the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it.” Said Goolsbee.
On the Loonie front, the further decline of crude oil prices might continue to undermine the Canadian Dollar (CAD) and cap the downside for USD/CAD. 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).
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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