- USD/CAD is trading flat with slight losses near 1.3680 in early Asian trading on Tuesday.
- Fed’s Powell said the central bank won’t wait until inflation hits 2% to cut interest rates.
- Falling crude oil prices weigh on the commodity-linked CAD.
The USD/CAD pair consolidates its gains around 1.3680 during the early hours of the Asian session on Tuesday. The US Dollar regains some lost ground as traders await Canadian Consumer Price Index (CPI) inflation data and US Retail Sales on Tuesday for fresh impetus. Also, Federal Reserve (Fed)’s Adriana Kugler is scheduled to speak.
Fed Chair Jerome Powell said Monday that the U.S. has performed remarkably well in recent years, adding that the central bank won’t wait until inflation hits the 2% annual target. Meanwhile, San Francisco Federal Reserve Bank President Mary Daly didn’t provide timing-based guidance for rate cuts but acknowledged significant progress on inflation.
The odds of Fed rate cuts in September are increasing after weaker US inflation data last week, which could weigh on the US Dollar (USD). Traders continue to anticipate a rate cut in September followed by further cuts in November and December, taking the policy rate to 4.5%-4.75% by the end of the year.
On the other hand, the Bank of Canada (BoC) Business Outlook Survey on Monday showed that business and consumer expectations on inflation are subdued. “Overall, all or most of the data included in that report could be used by the Bank of Canada later this month to cut rates by another 25 basis points,” said David Doyle, managing director and head of economics at Macquarie Group. Meanwhile, falling crude oil prices could drag down the commodity-linked Canadian dollar (CAD) and limit the pair’s downside as Canada is the top exporter of crude oil to the United States.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. 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) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures 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 confidence surveys can 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 can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
