- USD/CAD grapples to hold ground after rebounding from a five-month low of 1.3498, recorded on Monday.
- The US Dollar depreciated due to Fed Chair Powell’s dovish speech at the Jackson Hole Symposium.
- The commodity-linked CAD may advance further due to the higher crude Oil prices.
USD/CAD rebounds from its five-month low of 1.3498, recorded on Monday, currently hovering around 1.3510 during the early European session on Monday. This upside could be attributed to the improved US Dollar (USD) amid increased risk aversion. However, the Greenback may receive downward pressure from the rising odds of a Federal Reserve (Fed) rate cut in September.
Fed is highly expected to deliver atleast a 25-basis point rate cut in September. According to the CME FedWatch Tool, markets are now fully anticipating at least a quarter-basis point (bps) rate cut by the Federal Reserve at its September meeting.
At the Jackson Hole Symposium on Friday, Fed Chairman Jerome Powell remarked, "The time has come for policy to adjust." While he did not provide specific details on the timing or scale of potential rate cuts, Powell highlighted that risks in the job market have risen, whereas inflation risks have diminished.
The commodity-linked Canadian Dollar (CAD) received support from the higher crude Oil prices. West Texas Intermediate (WTI) price extends its gains for the third consecutive day, trading around $75.20 per barrel at the time of writing. Crude Oil prices appreciate due to rising supply fears over geopolitical tensions in the Middle East.
Hezbollah launched hundreds of rockets and drones into Israel on Sunday, prompting a response from the Israeli military, which deployed around 100 jets to strike Lebanon in an effort to prevent a larger assault. This escalation heightens concerns that the ongoing Gaza conflict could expand into a broader regional conflict, potentially involving Hezbollah's supporter, Iran, and Israel's primary ally, the United States, according to Reuters.
However, the dovish stance of the Bank of Canada (BoC) regarding its policy outlook may limit the upside of the CAD and underpin the USD/CAD pair. The BoC has already commenced its cutting cycle to address growth concerns and a moderating labor market domestically.
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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