- USD/CAD is trading firmer around 1.3525 in the early Asian session on Tuesday.
- The Fed’s Powell said the central bank will lower interest rates “over time.”
- The Canadian economy expanded 0.2% month-on-month in July, faster than expected; The advanced estimate indicated that growth likely stalled in August.
The USD/CAD pair gains strength near 1.3525 during the early Asian session on Tuesday. The pair’s rally is supported by a stronger US Dollar (USD) after Federal Reserve (Fed) Chairman Jerome Powell said the central bank is in no hurry and will lower its benchmark rate “over time” . Investors are looking to the US ISM Manufacturing Purchasing Managers’ Index (PMI) to gain fresh impetus, which is estimated to improve to 47.5 in September from 47.2 in August.
Fed Chair Jerome Powell said Monday that the recent half-percentage point interest rate cut should not be interpreted as a sign that future moves will be so aggressive, adding that future moves will be smaller. The comments came less than two weeks after the US central bank decided to cut the interest rate by 50 basis points (bps).
Fed officials forecast an additional half-point cut for the rest of 2024 and one more percentage point of reductions next year, according to median projections from the September meeting. However, several officials estimated a smaller amount of easing by the end of the year, providing some support to the US dollar.
Canada’s economy grew faster than expected in July, but appears to be expanding at a slower pace in August, raising expectations of a larger interest rate cut by the Bank of Canada (BoC) in October. Financial markets expect the Canadian central bank to continue lowering interest rates further due to rising risks to the economy and labor market, which could put some selling pressure on the Canadian Dollar (CAD) and create a wind of queue for USD/CAD.
The Canadian Dollar FAQs
The key factors that determine the price of 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 product, 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 are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the 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 usually 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 also rises, 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 happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.
The published macroeconomic data measures the health of the economy and may 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 may encourage the Bank of Canada to raise interest rates, resulting in a stronger currency. However, if 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.
