- USD/CAD depreciates on risk sentiment amid rising odds of a 50bp rate cut by the Fed.
- The CME FedWatch tool suggests the probability of a 50 basis point rate cut by the Fed rises to 59.0%.
- Lower oil prices may have put downward pressure on the commodity-linked Canadian dollar.
USD/CAD eased to near 1.3580 during early European hours on Monday as the US Dollar (USD) came under downward pressure amid increasing likelihood that the US Federal Reserve will opt for an aggressive 50 basis point rate cut at its next scheduled monetary policy meeting on Wednesday.
According to the CME FedWatch tool, markets are anticipating a 41.0% chance of a 25 basis point (bps) rate cut by the Fed at its September meeting. The probability of a 50 bps rate cut has risen to 59.0%, up from 50.0% yesterday.
Additionally, lower US Treasury yields are contributing to downward pressure on the dollar. The Dollar Index (DXY), which measures the value of the US dollar against its six major peers, is trading around 100.70 with 2-year and 10-year US Treasury bond yields standing at 3.55% and 3.64%, respectively, at the time of writing.
As for the CAD, lower crude oil prices might have put downward pressure on the Canadian dollar and limited the downside of the USD/CAD pair. The West Texas Intermediate (WTI) oil price remains subdued around $68.40 per barrel at the time of writing. Concerns over slowing fuel demand in the world’s largest oil importer resurfaced following a string of disappointing Chinese economic data over the weekend, which put pressure on oil prices.
Additionally, the Canadian dollar (CAD) could weaken on rising expectations of further interest rate cuts by the Bank of Canada (BoC). Traders are likely to monitor Canada’s Consumer Price Index (CPI) data for August, scheduled for release on Tuesday. This inflation report could offer fresh insights into the Bank of Canada’s expectations ahead of its policy decision in October.
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.
