- USD/CAD trades on a stronger note around 1.3755 in Tuesday’s early Asian session.
- Fed officials noted that the central bank is getting “closer” to start easing its policy.
- The BoC is expected to cut interest rates by 25 bps at its July meeting on Wednesday.
The USD/CAD pair trades in positive territory for the fifth consecutive day near 1.3755, snapping the four-day winning streak during the early Asian session on Tuesday. The USD Index (DXY) consolidates around 104.30 ahead of important US economic data releases later in the week. The Bank of Canada (BoC) will announce its interest rate decision on Wednesday.
The US Federal Reserve (Fed) Chair Jerome Powell and his colleagues noted that they are becoming more hopeful about the progress on inflation in recent months. New York Fed President John Williams and Governor Christopher Waller indicated that the central bank is getting “closer” to where it wants to be in terms of rate cuts. Traders in Fed Funds Futures markets have fully priced in rate cuts in September, with at least two quarter-point cuts in 2024.
The expectation of Fed rate cuts this year has weighed on the Greenback for the time being. However, traders will take more cues from the data this week. The US Existing Home Sales, the Richmond Fed Manufacturing Index, and the API crude oil inventories data are due on Tuesday.
On the Loonie front, The BoC is anticipated to cut rates again by 25 basis points (bps) to 4.5% as inflation eases. Traders have priced in nearly 93% odds of BoC rate cuts on Wednesday and a total of 75 bps cut in borrowing costs this year. "A rate cut is likely to be delivered," said Taylor Schleich, rates strategist at the National Bank of Canada. Meanwhile, oil demand concerns and easing geopolitical fears might drag crude oil prices lower and undermine the commodity-linked Canadian Dollar (CAD) in the near term.
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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