- USD/CAD weakens near 1.3805 in Thursday’s early Asian session.
- The Fed kept its key interest rate at 5.25% to 5.5% at its July meeting on Wednesday.
- Higher crude oil prices amid Middle East geopolitical risks support the commodity-linked Loonie.
The USD/CAD pair trades on a softer note near 1.3805 during the early Asian session on Thursday. The further downside of the US Dollar (USD) after the Federal Reserve (Fed) decided to hold rates unchanged, drags the pair to the weekly lows. Investors will take more cues from the US ISM Manufacturing PMI, weekly Initial Jobless Claims, and the final S&P Global Manufacturing PMI, which are due later on Thursday.
As widely expected by market players, the US Fed left the policy rate, federal funds rate, unchanged at the range of 5.25%-5.50% at its July meeting on Wednesday. Fed Chair Jerome Powell said during the press conference that a rate cut in September is “on the table. Powell added that the central bank will closely monitor the labor market and stay vigilant for signs of a potentially sharp downturn.
Dovish comments from the Fed and rising expectations for rate cuts in September exert some selling pressure on the Greenback. According to the CME FedWatch tool, traders are now pricing in a 100% chance that the central bank will cut interest rates by 25 basis points (bps) in its September meeting.
On the Loonie front, the recovery of crude oil prices amid escalating geopolitical tensions in the Middle East and a decline in weekly US crude oil inventories help limit the Canadian Dollar’s (CAD) losses. 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).
On the other hand, the rising bets that the Bank of Canada (BoC) will continue to ease policy after its latest interest rate cut last week might cap the CAD’s upside. Traders expect one more 25 bps rate cut this year, with nearly 60% odds that the BoC will cut rates again in its September meeting.
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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