- USD/CAD is trading flat around 1.3505 in early Asian session on Thursday.
- The BoC cut interest rates by 25 bps, taking its policy rate to 4.25% on Wednesday.
- JOLTS job openings fell to a three-and-a-half-year low in July, weighing on the USD.
The USD/CAD pair is trading flat near 1.3505 during the early Asian session on Thursday. The Bank of Canada (BoC) cut interest rates as expected, while US job openings came in weaker than expected. Traders are looking to the release of the US August ISM Services PMI data on Thursday for fresh impetus, which is expected to ease to 51.1 from 51.4 in July.
The Bank of Canada (BoC) decided to cut its benchmark interest rate for the third time in a row at its September meeting on Wednesday, as widely expected. BoC Governor Tiff Macklem said: “If inflation continues to decline in line with our July forecast, it is reasonable to expect further cuts to our policy rate.”
During the press conference, BoC’s Macklem said a 25 basis point (bp) cut seemed appropriate, adding that he does not see a major impact on the exchange rate due to the divergence with the US Federal Reserve (Fed) on rates.
Meanwhile, crude oil prices fell to the lowest level in nine months as weak US economic data and a sluggish Chinese economy raised concerns about a weaker global economy. It is worth noting that Canada is the largest exporter of oil to the United States (US), and lower crude oil prices tend to have a negative impact on the value of the CAD.
Data released by the Labor Department on Wednesday reported that the Job Openings and Labor Turnover Survey showed that available positions fell to 7.67 million in July, compared with 7.91 million openings (revised from 8.1 million) seen in June and falling short of the market consensus of 8.1 million.
Dovish comments from Atlanta Fed President Raphael Bostic could undermine the USD. Bostic stated that he is ready to start cutting interest rates even though inflation is still above the US central bank’s target. Markets now price in a nearly 57% chance of a 25 basis point (bp) rate cut by the Fed in September, while the chance of a 50 bp reduction stands at 43%, according to the CME’s FedWatch tool.
Looking ahead, US Non-Farm Payrolls (NFP) for August will be released on Friday, and are projected to show an increase of 161,000. This event could offer some clues about the size of the Fed’s rate cut this year and provide a clear trading opportunity for the USD/CAD pair.
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.
