- USD/CAD weakens near 1.3605 in Friday’s early Asian session.
- US S&P Global PMI was stronger than expected in August's flash estimate.
- Markets expect the BoC to cut the rate by 25 bps for the remaining monetary meetings of the year.
The USD/CAD pair trades softer around 1.3605 during the early Asian session on Friday. However, the cautious mode in the market might lift the US Dollar (USD) ahead of the key event. The US Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole Symposium will take centre stage on Friday.
Data released by S&P Global on Thursday showed that the US Composite Purchasing Managers Index (PMI) fell slightly to 54.1 in August's flash estimate, its lowest level in four months, from 54.3 in July. This figure came in better than the expectation of 53.5. Meanwhile, Manufacturing PMI dropped to 48 in the same period from 49.6, while the Services PMI rose to 55.2 from 55. The Greenback edges higher in an immediate reaction to the encouraging US PMI data.
The July FOMC Minutes released on Wednesday showed that the “vast majority” of FOMC participants supported the case to lower the interest rate at the upcoming September meeting if data met expectations. Investors have priced in a 100 basis points (bps) of a Fed total rate cut by year-end, but those odds will likely change after Powell’s speech. Any additional dovish comments from Fed officials might continue to undermine the USD against the Loonie.
On the Loonie front, the recent Canadian July inflation data has triggered the bets that the Bank of Canada (BoC) would set for its third interest rate cut in a row come September. Money markets are now expecting rate cuts of 25 bps for the remaining monetary meetings of the year. This, in turn, might weigh on the Canadian Dollar (CAD) and help limit USD/CAD’s losses.
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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