USD/CAD softens to near 1.3900 ahead of Powell's Jackson Hole speech
- USD/CAD weakens to around 1.3905 in Friday’s early Asian session.
- Flash US S&P Global Manufacturing PMI surprises to the upside in August.
- A recovery in crude oil prices lifts the commodity-linked Loonie.
The USD/CAD pair loses traction to near 1.3905, snapping the three-day winning streak during the early Asian session on Friday. A rebound in crude oil prices provides some support to the commodity-linked Loonie. All eyes will be on the key speech by Federal Reserve (Fed) Chair Jerome Powell at the Jackson Hole Symposium later on Friday.
The preliminary reading on S&P Global’s Composite PMI showed on Thursday that US business activity picked up pace in August, with the index at 55.4 versus 55.1 prior. Meanwhile, the US Manufacturing PMI rose to 53.3 in August from 49.8 in July, above the market consensus of 49.5. Services PMI eased to 55.4 in August from 55.7 in the previous reading, but was stronger than the 54.2 expected.
The upbeat US S&P Global PMI reports fail to boost the Greenback as traders continue to price in a rate cut in the Fed’s September meeting. According to the CME FedWatch tool, Fed funds futures traders are now pricing in a 74% chance of a rate reduction next month, down from 82% on Wednesday. They are also pricing in 49 basis points (bps) of cuts by year-end, down from 54 bps.
Meanwhile, a recovery in crude oil prices underpins the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
On the other hand, traders ramp up their bets that the Bank of Canada (BoC) would deliver a rate reduction at the next policy decision in September after Canadian Consumer Price Index (CPI) inflation data. This, in turn, could weigh on the Canadian Dollar and create a tailwind for the pair.
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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