- USD/CAD consolidates near 1.3635 in early Asian session on Wednesday.
- Fed’s Powell said “more good data” could open the door to rate cuts.
- Weaker Canadian jobs data has boosted expectations for BoC rate cuts.
The USD/CAD pair remains bound within a narrow trading range around 1.3635 during the early Asian session on Wednesday. Meanwhile, the US Dollar Index (DXY) consolidates its gains beyond the 105.00 hurdle as traders await the second semi-annual testimony from Federal Reserve (Fed) Chair Jerome Powell along with speeches from Fed Chair Michelle Bowman and Austan Goolsbee.
On Tuesday, the Fed’s Powell presented the Semiannual Monetary Policy Report and answered questions before the Senate Banking Committee on the first day of his testimony before Congress. Powell said that keeping interest rates too high for too long could hurt economic growth. He further claimed that “more good data” could open the door to interest rate cuts as recent data indicated that the labor market and inflation continue to cool.
The US central bank has kept the Fed federal funds rate in a range of 5.25%-5.50% since July 2023, the highest in 23 years after inflation hit its highest level since the early 1980s. According to data from the CME FedWatch tool, investors are now pricing in a 74% chance of a Fed rate cut in September, up from 71% last Friday. However, Federal Open Market Committee (FOMC) members at their June meeting indicated only one cut this year. The expectation of a Fed rate cut could put some selling pressure on the US Dollar (USD) in the near term.
On the other hand, weaker than expected Canadian labour market data has triggered speculation about a rate cut by the Bank of Canada (BoC). The country’s unemployment rate rose to 6.4% in June from 6.2% in May. An economist at the National Bank said the unemployment rate in Canada could reach or exceed 7% this year if the BoC does not make rate cuts “sooner rather than later.”
Elsewhere, crude oil prices declined for a third consecutive day as hurricane-driven supply concerns eased and geopolitical jitters remained subdued. Nevertheless, the rebound in oil prices could boost the commodity-linked Canadian dollar (CAD) as Canada is the top exporter of crude oil to the United States.
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.
