USD/CAD trades flat below 1.3750 as traders await nominations for next Fed Chair
- USD/CAD trades on a flat note around 1.3740 in Thursday’s early Asian session.
- Increased expectations of a Fed rate cut might weigh on the US Dollar.
- Traders will closely monitor the nominations for the next Fed Chair.
The USD/CAD pair holds steady near 1.3740 during the early Asian session on Thursday. Investors remain cautious about US President Trump’s plans for Chief Jerome Powell’s replacement and further developments on tariffs ahead of the upcoming deadline. The US weekly Initial Jobless Claims and Canada’s Ivey Purchasing Managers Index (PMI) report will be released later on Thursday.
Traders raise their bets that the US Federal Reserve (Fed) will reduce the interest rates more times than previously expected this year after weaker-than-expected US jobs data for July, which might weigh on the US Dollar (USD). Fed funds futures traders are now pricing in a nearly 95% chance of a 25 basis point (bps) cut at the September meeting, up from 48% a week ago, according to the CME FedWatch tool. Traders see 62 bps in reductions this year.
In the absence of top-tier US economic releases on Thursday, traders will keep an eye on the developments surrounding nominations for the next Fed Chair. Trump said on Tuesday that he has narrowed the field of potential future Fed chairs to four candidates, a list that does not include US Treasury Secretary Scott Bessent. Additionally, Trump noted that he will name a replacement for Fed Governor Adriana Kugler by the end of the week.
Meanwhile, a decline in crude oil prices due to rising OPEC+ supply and worries of weaker global demand might undermine the commodity-linked Loonie and cap the downside for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge 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 sentiment surveys can all 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 put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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