- USD/CAD is holding steady around 1.3585 in early Asian trading on Tuesday.
- The US Fed is widely expected to cut interest rates on Wednesday, its first cut in four years.
- The Canadian CPI inflation report is due out later on Tuesday.
The USD/CAD pair is trading flat near 1.3585 during the early Asian session on Tuesday. The US Dollar (USD)’s further decline ahead of the US Federal Reserve’s (Fed) key interest rate decision is likely to limit the pair’s upside. Later on Tuesday, investors will closely watch the Canadian Consumer Price Index (CPI) and US Retail Sales for August for fresh impetus.
The Fed will announce its interest rate decision on September 18, and is widely expected to cut the federal funds rate by 25 basis points (bps) or 50 bps. According to the CME FedWatch tool, traders are now pricing in a nearly 67% chance of a 50 bps reduction, up from 50% on Friday. Meanwhile, the odds of a 25 bps rate cut stand at 33%.
Following the policy meeting, Fed officials will release new interest rate projections, known as the “dot plot,” which could offer some clues about the outlook for U.S. interest rates for the rest of this year and next. The expectation of larger rate cuts could put some selling pressure on the dollar in the near term.
Canadian CPI inflation data for August is due out on Tuesday, and is expected to rise 2.2% compared to a year earlier, down from the 2.4% annual increase in July. Forecasters also estimated inflation to rise 0.1% on a monthly basis in August. Any signs of slowing inflation could prompt the Bank of Canada (BoC) to accelerate cuts to its key interest rate if circumstances warrant. However, if inflation is stronger than expected, the Canadian central bank could slow the pace of rate cuts.
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.
