- USD/CAD is trading near a nine-month high near 1.3900 ahead of US NFP data for July.
- Market sentiment remains risk-averse amid fears of a possible US slowdown.
- The BoC could cut interest rates again.
The USD/CAD pair is trading near a nine-month high at 1.3890 in the European session on Friday. The Canadian dollar asset is showing strength amid a dismal market mood. Fears of a severe slowdown in the United States (US) economy have deepened after the US ISM manufacturing PMI report showed a sharp contraction in factory activities in July and initial jobless claims hit the highest level in 11 months for the week ended July 26.
S&P 500 futures have posted significant losses in European trading hours, showing a sharp decline in investors’ risk appetite. Meanwhile, investors turned to the Japanese Yen (JPY) and Swiss Franc (CHF) as safe-haven bets.
The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is down near 104.10. Yields on 10-year US Treasury bonds have fallen further to 3.94% as speculation that the Federal Reserve (Fed) will start cutting interest rates from the September meeting seems certain.
In Friday’s session, the US Dollar (USD) will be impacted by the US Non-Farm Payrolls (NFP) data for July, due out at 12:30 GMT. The employment data is expected to show that 175,000 new workers were hired in July, down from the 206,000 payrolls recorded in June. The annual Average Hourly Earnings data is expected to have slowed to 3.7%.
Meanwhile, the Canadian dollar (CAD) is weakening on expectations that the Bank of Canada (BoC) could cut interest rates again. Price pressures in the Canadian economy have eased significantly, and investors remain concerned about deteriorating spending and investment. This would force the BoE to extend the period of policy easing.
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.
