USD/CAD remains below 1.3750 as Fed rate cut bets weigh on US Dollar
- USD/CAD depreciates as the US Dollar struggles amid rising odds of Fed rate cuts.
- US inflation increased in July, a rise partly attributed to President Trump’s tariffs.
- The commodity-linked CAD may have come under pressure from weaker Oil prices.
USD/CAD loses ground for the fifth consecutive session, trading around 1.3740 during the Asian hours on Monday. The pair depreciates as the US Dollar (USD) faces challenges amid rising bets of an interest rate cut by the US Federal Reserve (Fed) in the September meeting. However, the volumes are expected to be low as the United States (US) and Canadian markets will observe the Labor Day holiday on Monday.
San Francisco Fed President Mary Daly said on Sunday that policymakers will be ready to cut interest rates soon, adding that inflation stemming from tariffs will likely prove temporary, per Bloomberg.
Friday’s data showed that United States (US) inflation rose in July, which could be attributed to US President Donald Trump’s tariffs. US Personal Consumption Expenditures (PCE) Price Index held steady at 2.6% year-over-year in July, coming in line with the market expectation. The US core PCE Price Index, which excludes volatile food and energy prices, rose 2.9% YoY in July, as expected, following June's increase of 2.8%. On a monthly basis, the core PCE Price Index rose 0.2% and 0.3%, respectively.
The US Court of Appeals for the Federal Circuit upheld a ruling that the sweeping tariffs the US President Donald Trump unilaterally imposed on most other countries were illegal, CNN reported on Friday. US Trade Representative Jamieson Greer said in a Fox News interview on Sunday that US President Donald Trump’s administration will likely continue negotiations with its trade partners despite a US court ruling.
The downside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) could have faced challenges amid weaker Oil prices. It is noteworthy that Canada is the largest Oil exporter to the United States (US).
West Texas Intermediate (WTI) Oil price extends its losses for the second successive session, trading around $63.50 per troy ounce at the time of writing. Crude Oil prices struggle due to prevailing oversupply concerns and weaker demand prospects.
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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