- USD/CAD trades with mild losses around 1.3480 in Thursday’s early Asian session.
- The Fed's dovish remarks continue to weigh on the US Dollar.
- The BoC is expected to cut more interest rates in its September meeting next week.
The USD/CAD pair trades on a weaker note near 1.3480 during the early Asian session on Thursday. The US Federal Reserve (Fed) Chair Jerome Powell signalled that the central bank is ready to ease its monetary policy this year, which weighed on the Greenback in the previous session. Investors await the preliminary US Q2 Gross Domestic Product (Q2) and the Fed's Raphael Bostic speech on Thursday for fresh drivers.
Fed Chair Jerome Powell hinted at Jackson Hole last week that cutting the interest rates is finally on the horizon, saying that “the time has come for policy to adjust.” Markets are now pricing in around 25-35% for a 50 basis points (bps) Fed rate cut, with 100 bps of easing still seen by year-end. Market players will closely watch the US employment report, as any signs of weakness in the labor market could trigger a deeper rate cut by the Fed and continue to undermine the US Dollar (USD).
The usual weekly Initial Jobless Claims for the week ending August 24 are estimated to remain unchanged at 232K compared to the previous reading. The attention will shift to the US Nonfarm Payrolls for August next week, which might offer some hints about the size of the Fed rate cut.
On the CAD’s front, economists expect the Bank of Canada (BoC) to cut additional interest rates for a third consecutive meeting next week due to persistent economic weakness, rising unemployment, and cooling down inflation. This, in turn, might drag the Canadian Dollar (CAD) lower against the Greenback.
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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