- USD/CAD is trading in positive territory near 1.3605 in early Asian session on Thursday.
- The Fed lowered its benchmark interest rate by half a percentage point at its September meeting on Wednesday.
- Both faster and slower rate cuts are on the table, the BoC deliberations indicated.
The USD/CAD pair is posting modest gains around 1.3605 during the early Asian session on Thursday. Traders continue to evaluate the Federal Reserve’s (Fed) 50 basis points (bps) interest rate cut in a rather volatile session on Wednesday. Investors will be keeping an eye on the US weekly initial jobless claims, the Philly Fed manufacturing index and existing home sales, which will be released later in the day.
The Federal Open Market Committee (FOMC) decided to lower the federal funds rate to a range of 4.75% to 5%, the Fed’s first rate cut in more than four years. Fed Chairman Jerome Powell said at a press conference after the policy meeting: “This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, labor market strength can be maintained against a backdrop of moderate growth and inflation declining sustainably to 2%.”
The US Dollar (USD) initially fell following the Fed’s decision but pared losses after Chairman Jerome Powell finished his press conference. Additionally, Fed policymakers revised their quarterly economic forecasts, raising the median unemployment projection for the end of 2024 to 4.4% from 4% projected in June. Officials again raised their projection for the long-term federal funds rate to 2.9% from 2.8%.
According to a summary of its deliberations, the Bank of Canada (BoC) is carefully assessing both upside and downside risks to the economy in order to determine the pace of interest rate cuts. The deliberations that led to the BoC’s September rate cut came several weeks before Tuesday’s inflation data, which showed the Canadian Consumer Price Index (CPI) rose at an annualized rate of less than 2% in August, meeting the central bank’s target.
Money markets see a nearly 46% chance of a 50bp rate cut in October. Softer inflation and growing speculation of additional rate cuts by the BoC are likely to weigh on the Canadian Dollar (CAD) and support the USD/CAD pair in the near term.
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.
