- USD/CAD holds positive ground around 1.3460 in Wednesday’s early European session.
- The risk aversion sentiment lifts the safe-haven currency like the US Dollar, but Fed rate cut bets might cap its upside.
- The BoC is anticipated to cut its interest rate next week as inflation eases.
The USD/CAD pair recovers some lost ground near 1.3460, snapping the three-day losing streak during the early European session on Wednesday. The uptick of the pair is bolstered by the modest recovery of the US Dollar (USD). Market players will take more cues from the Federal Reserve’s (Fed) Christopher Waller and Raphael Bostic speeches later on Wednesday.
The cautious mood ahead of the AI giant’s Nvidia earnings reports and Fedspeak might boost the safe-haven flows, benefiting the USD. However, the firmer expectation that the US Fed would lower its borrowing costs in September might cap the pair’s upside. The markets have fully priced in a 25 basis points (bps) rate cut in September, while the possibility of a deeper rate cut stands at 34.5%, according to the CME FedWatch Tool. Traders see 100 bps Fed easing this year.
San Francisco Fed President Mary Daly said on Monday that she believes it’s appropriate for the Fed to begin cutting interest rates. Her comments echoed remarks from Fed Chair Jerome Powell at the Jackson Hole symposium, who said that he has gained confidence that inflation is on course to the 2% target and “the time has come for policy to adjust.”
On the Loonie front, economists expect the Bank of Canada (BoC) to cut interest rates for a third consecutive meeting on the September 4 policy meeting, according to the median estimate in an August poll conducted by Bloomberg. This, in turn, might weigh on the Canadian Dollar (CAD) against the USD. Meanwhile, the lower crude oil prices contribute to the commodity-linked CAD’s downside, as Canada is the leading exporter of oil to the United States.
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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