- USD/CAD consolidates in a trading range near 1.3685 in Thursday’s early Asian session.
- Fed’s Waller signalled a potential interest rate cut this year.
- Softer Canadian CPI inflation data has triggered the BoC rate cut expectation next week.
The USD/CAD pair oscillates in a familiar trading range around 1.3685 during the early Asian session on Thursday. The further decline in the USD Index (DXY) amid the firmer rate-cut bets by the Federal Reserve (Fed) might cap the pair’s upside. Investors will monitor the US weekly Initial Jobless Claims and the Philly Fed Manufacturing Index later on Thursday, along with the speech by the Fed’s Lorie Logan.
On Wednesday, Fed Governor Christopher Waller said that the US central bank is ‘getting closer’ to an interest rate cut as long as there are no major surprises on inflation and employment. Meanwhile, Richmond Fed President Tom Barkin said that the central bank needs more evidence that the process of disinflation is sustained before cutting the key interest rate.
According to the CME Group’s FedWatch Tool, traders in the fed funds futures market are pricing in an initial quarter percentage point rate cut in September followed by at least one more before the end of this year. The growing speculation of Fed rate cuts and dovish comments from Fed officials is likely to undermine the Greenback in the near term.
On the Loonie front, slower-than-expected Canadian Consumer Price Index (CPI) inflation data has spurred the expectation that the Bank of Canada (BoC) might cut another interest rate next week, which exerts some selling pressure on the Canadian Dollar (CAD). Financial markets have priced in nearly 93% odds of July rate cuts by the BoC, up from 82% before the inflation data was released.
On the other hand, the higher crude oil prices amid a larger-than-expected weekly drop in US crude oil inventories might lift the commodity-linked Loonie. It’s worth noting that Canada is the biggest Oil exporter to the United States (US).
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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