- USD/CAD is trading flat near 1.3485 in early Asian trading on Thursday.
- A dovish Fed could further weaken the US dollar in the near term.
- BoC’s Macklem said it was reasonable to expect further rate cuts.
The USD/CAD pair is flat around 1.3485 after retreating to 1.3420, the lowest level since March 8, during early Asian trading on Thursday. Investors are mulling over the path of Federal Reserve (Fed) rate cuts and digesting US housing market data. Fed Chair Jerome Powell’s speech will be in focus later in the day.
Traders are awaiting fresh catalysts following last week’s large 50 basis point (bp) rate cut by the US central bank. Fed Governor Adriana Kugler said on Wednesday that she “strongly supported” the central bank’s decision last week, adding that further rate cuts would be appropriate if inflation continues to decline as expected. Dovish comments from Fed officials will likely put some selling pressure on the dollar in the near term.
U.S. new home sales fell 4.7 percent month-on-month to 716,000 in August from a revised 751,000 in July, the Commerce Department reported Wednesday. The figure was better than expected.
Later on Thursday, the Fed’s Susan Collins, Adriana Kugler, Michelle Bowman, John Williams, Michael Barr, Neel Kashkari and Jerome Powell are all scheduled to speak. Traders will be taking cues from the comments as they could offer some clues about the outlook for US interest rates. Also, weekly US initial jobless claims, durable goods orders and the final annualized reading of US second quarter (Q2) gross domestic product (GDP) will be released.
Bank of Canada (BoC) Governor Tiff Macklem said on Tuesday that the central bank has made progress in bringing inflation back to the 2% target, so it is reasonable to expect further rate cuts. The BoC’s next interest rate decision is scheduled for Oct. 23, and money markets see a greater than 58% chance of 50bp rate cuts. Another 25bp cut is forecast for its final meeting of the year in December.
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.