- USD/CAD trades on a softer note around 1.3675 in Wednesday’s early Asian session.
- Fed’s Powell sees progress on inflation, but he wants to see further evidence before cutting interest rates.
- Canadian S&P Global Manufacturing PMI remained steady at 49.3 in June, weaker than expected.
The USD/CAD pair edges lower to 1.3675 during the early Asian trading hours on Wednesday, supported by the weaker US Dollar (USD). Traders will take more cues from the US ADP Employment Change, ISM Services PMI for June, and the FOMC Minutes, which are due later on Wednesday.
The Federal Reserve (Fed) Chair Jerome Powell turned slightly dovish on Tuesday, which has dragged the Greenback lower. Powell said that the Fed is getting back on the disinflationary path. However, Powell wants to see further evidence before cutting interest rates as the US economy and the labor market remain strong. Meanwhile, Chicago Fed President Austan Goolsbee said on Tuesday that progress on the final chunk of inflation heading towards the Fed's 2% inflation target will happen faster than many expect.
US JOLTS Job Openings climbed to 8.14 million in May, followed by the 7.91 million (revised from 8.05 million) openings reported in April. This figure exceeded the forecasts of 7.91 million, US Bureau of Labor Statistics reported on Tuesday.
On the CAD’s front, manufacturing activity in Canada remained weak in June as new orders declined and firms cut jobs for the first time in five months. The Canadian S&P Global Manufacturing PMI remains steady at 49.3 in June, weaker than the market estimation of 50.2. This figure registered the 14th straight month of contraction, the longest run in records dating back to October 2010.
Traders will closely watch the Canadian employment data on Friday. The Unemployment Rate is expected to rise to 6.3% in June, while the Canadian economy is estimated to see 22.5K jobs added in the same period.
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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