- USD/CAD drops to 1.3575 in Monday’s Asian session.
- Growing anticipation of further rate cuts by the Fed weighs on the US Dollar.
- BoC’s Macklem said he has opened the door to accelerating the pace of interest rate cuts.
The USD/CAD pair lost traction near 1.3575 during Asian trading hours on Monday, pressured by a weaker US Dollar (USD). The Federal Reserve (Fed) interest rate decision will be in focus on Wednesday. Investors will monitor how aggressively the US central bank will cut interest rates.
Former New York Fed President William Dudley said Friday that there is scope for a half-point rate cut at Wednesday’s Fed meeting as FOMC members try to maneuver a “soft landing” for the economy. Growing anticipation of steeper rate cuts by the Fed is putting some selling pressure on the dollar. The CME’s FedWatch tool showed that markets have priced in a nearly 49% chance of a deeper rate cut by the Fed, a significant jump from a 28% chance a day earlier.
On the other hand, data released by the University of Michigan on Friday showed that the Consumer Sentiment Index rose to 69.0 in September from 67.9 previously. This figure exceeded the market consensus of 68.0.
As for the Loonie, Bank of Canada (BoC) Governor Tiff Macklem said on Sunday that he has opened the door to accelerating the pace of interest rate cuts. Macklem added that it might be appropriate to move interest rates faster if growth disappoints. This, in turn, could drag down the Canadian Dollar (CAD) against the USD. Meanwhile, lower crude oil prices could limit the downside of the commodity-linked CAD as Canada is the largest exporter of oil to the United States (US).
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.
