- USD/CAD appreciates due to the rising likelihood of further interest rate cuts by the Bank of Canada.
- BoC Governor Tiff Macklem stated that policymakers could switch to a 50 basis point rate cut if economic growth underperforms.
- CME FedWatch Tool suggests odds of a 50 basis points Fed interest rate cut have surged to 62.0%.
USD/CAD recovers its recent losses registered in the previous session, trading around 1.3600 during Tuesday’s Asian hours. The Canadian Dollar (CAD) might have received downward pressure from growing expectations of further interest rate cuts by the Bank of Canada (BoC).
Additionally, the recent comments of Bank of Canada (BoC) Governor Tiff Macklem might have put downward pressure on the Canadian Dollar. Macklem has opened the door to accelerating the pace of interest rate reductions. He further stated that policymakers could switch to a 50 basis point (bps) rate cut if economic growth underperforms, per the Financial Times.
Traders will likely monitor Canada's Consumer Price Index (CPI) data for August, scheduled for release later in the North American session. This inflation report could offer fresh insights into the Bank of Canada's outlook ahead of its October policy decision.
However, the upside of the USD/CAD pair may be limited as the US Dollar faces challenges amid increasing expectations of an aggressive 50 basis points Fed rate cut on Wednesday. However, the improved US Treasury yields could support for Greenback.
The US Dollar Index (DXY), which measures the value of the US Dollar against its six other major peers, trading around 100.70 with 2-year and 10-year standing at 3.56% and 3.63%, respectively, at the time of writing.
According to the CME FedWatch Tool, markets are pricing in a 38.0% chance of a 25 basis point Federal Reserve interest rate cut at the September meeting, while the probability of a 50 basis point cut has surged to 62.0%, up from 50.0% just a day earlier. This shift reflects heightened anticipation of more aggressive monetary easing.
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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