- USD/CAD remains on the defensive near 1.3510 during Monday’s Asian session.
- Powell’s dovish speech at Jackson Hole weighs on the US dollar.
- Canadian retail sales fell 0.3% month-on-month in June versus -0.8% previously, in line with market consensus.
The USD/CAD pair remains under some selling pressure around 1.3510 on Monday during Asian trading hours. The US Dollar (USD) is lower after Federal Reserve (Fed) Chairman Jerome Powell signaled that the time has come to cut interest rates starting this September.
Most Fed officials issued dovish messages, supporting the case for rate cuts in September. This, in turn, undermined the broader dollar in the previous sessions. Fed’s Powell noted, “The time has come to tighten policy.” Powell added, “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Meanwhile, Philadelphia Fed President Patrick Harker stressed that he supports two to three interest rate cuts in 2024 unless there are substantial changes in US economic data. Chicago Fed President Austan Goolsbee stated that monetary policy is currently at its most restrictive level, with the Fed’s focus now shifting to fulfilling its employment mandate. According to the CME FedWatch tool, traders have now fully priced in a 25 basis point (bps) rate cut in September, while the odds of a deeper cut stand at 36.5%, up from 24% last week.
Data released by Statistics Canada showed that Canadian retail sales fell 0.3% on a monthly basis in June from a 0.8% drop in the previous reading, in line with market consensus. Retail sales excluding autos unexpectedly rose 0.3% on a monthly basis in June, better than the estimate for a 0.2% drop. Market participants will be keeping an eye on Canada’s second-quarter gross domestic product (GDP) on Friday. Meanwhile, the Bank of Canada (BoC) is expected to cut another 75 basis points (bps) by the end of the year.
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.
