- USD/CAD depreciates as Fed is expected to cut rates in September.
- Fed Governor Christopher Waller said the U.S. central bank is “getting closer” to a rate cut.
- Lower WTI prices limit upside in the commodity-linked Canadian dollar.
The USD/CAD is retracing its recent gains from the previous session, trading around 1.3670 during the European session on Thursday. This drop is attributed to rising expectations that the Federal Reserve (Fed) will cut interest rates in September.
On Wednesday, Fed Governor Christopher Waller said the U.S. central bank is “getting close” to an interest rate cut. Meanwhile, Richmond Fed President Thomas Barkin said the decline in inflation had begun to broaden and he would like to see it continue, according to Reuters.
According to the CME Group’s FedWatch tool, markets now indicate a 93.5% probability of a 25 basis point rate cut at the Fed’s September meeting, up from 69.7% a week earlier.
However, falling crude oil prices are limiting the upside of the commodity-linked Canadian Dollar (CAD) as Canada is the largest exporter of oil to the United States (US). The price of West Texas Intermediate (WTI) oil is trading around $81.30 per barrel at the time of writing.
Despite the dovish sentiment around the Fed regarding its policy stance, US Treasury yields are improving due to rising risk aversion. This could have put pressure on oil prices. The 2-year and 10-year US Treasury bonds are at 4.45% and 4.17% respectively at the time of writing.
However, WTI prices gained ground in the Asian session on Thursday, boosted by a bigger-than-expected drop in crude stocks in the United States, the world’s largest oil consumer.
The U.S. Energy Information Administration (EIA) released the change in U.S. crude oil stocks on Wednesday, reporting a decline of 4.87 million barrels for the week ending July 12. This decline exceeds the expected drop of 0.80 million barrels and the previous decline of 3.443 million barrels.
Softer Canadian inflation readings have boosted expectations that the Bank of Canada (BoC) will cut interest rates further next week, which could limit the upside of the Canadian dollar (CAD).
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.
