- USD/CAD trades in negative territory around 1.3815 in Friday’s Asian session.
- Economic activity in the US was stronger than expected during the second quarter.
- The growing bets that the BoC would continue to cut interest rates weigh on the Loonie.
The USD/CAD pair trades with mild losses near 1.3815, snapping the seven-day winning streak during the early Asian session on Friday. However, the pair currently trades near the highest level since April 17 after the Bank of Canada (BoC) reduced its key borrowing rates again at its July meeting. The US Personal Consumption Expenditures (PCE) - Price Index for June will take centre stage later on Friday.
Data released by the Commerce Department showed on Thursday that an initial estimate of US Real Gross Domestic Product (GDP) during the April-through-June period, expanded at a 2.8% annualized pace adjusted for seasonality and inflation. This figure came in better than the market expectation of 2.1% following a 1.4% rise in the first quarter.
Currently, there's a 92.8% chance that the US Federal Reserve (Fed) will maintain its benchmark interest rate between 5.25% and 5.50% at the upcoming July meeting next week, according to the CME FedWatch Tool. Nonetheless, the release of the US PCE on Friday might offer some hints about the Fed interest rate path. The softer reading could weaken the Greenback and cap the pair’s upside.
The Canadian Dollar (CAD) remains under selling pressure as investors expect the Bank of Canada (BoC) to continue to ease policy after its latest interest rate cut on Wednesday. Financial markets expect one more 25 bps rate cut this year, with nearly 60% odds that the BoC will cut rates again in its September meeting. Meanwhile, the recovery of crude oil prices might provide some support to the commodity-linked Canadian Dollar. Higher oil prices generally lift the CAD as Canada is the leading exporter of Oil 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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