- USD/CAD is trading flat near 1.3850 in early Asian trading on Tuesday.
- The Fed is expected to keep interest rates unchanged at its July meeting on Wednesday.
- Lower crude oil prices and expectations of further rate cuts from the BoC continue to weigh on the Canadian dollar.
The USD/CAD pair is trading flat around 1.3850 during the early Asian session on Tuesday. The Dollar is likely to be supported by the risk-off sentiment. Traders are waiting on the sidelines ahead of the US Federal Reserve (Fed) interest rate decision on Wednesday.
Meanwhile, the US Dollar Index (DXY), which measures the value of the USD against a basket of global currencies, climbs to the highest level in almost three weeks above the 104.50 barrier. The Fed’s monetary policy on Wednesday will be a closely watched event, and it is anticipated to keep rates unchanged. Investors now see the first rate cut coming in mid-September, pricing in at least a quarter-percentage point rate cut by then at 100%, according to data from the CME’s FedWatch tool.
Fed officials said they are closer to having confidence that inflation is moving sustainably toward their 2% target. However, the central bank will take further cues from rising unemployment, another sign that cuts could be near.
On the Canadian Dollar front, falling crude oil prices are putting some selling pressure on the commodity-linked CAD. Lower oil prices typically drag the CAD lower as Canada is the top exporter of oil to the United States (US). Moreover, the expectation that the Bank of Canada (BoC) will continue to ease policy after its latest interest rate cut last week could further undermine the Canadian Dollar. Investors have priced in an additional 25 basis points (bps) rate cut this year, with a nearly 60% chance that the BoC will cut rates again at its September meeting.
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.
