USD/CAD steadies near four-week low amid thin holiday trading
- USD/CAD snaps a four-day losing streak, rebounding modestly as the Canadian Dollar weakens.
- The US Dollar stabilizes after dipping to a five-week low as thin liquidity prevails with the US and Canada on a bank holiday.
- The broader sentiment toward the Greenback remains fragile amid concerns about trade policy and risks to Fed independence.
The Canadian Dollar (CAD) is slightly weaker against the US Dollar (USD) on Monday, with USD/CAD rebounding from earlier losses to halt a four-day decline. The pair is trading higher on the day, benefiting from a modest recovery in the Greenback, which had earlier dipped to its lowest level in more than a month during Asian trading hours.
At the time of writing, the USD/CAD is trading around 1.3750 during the American session, though it remains anchored near its four-week low. Monday’s price action comes amid subdued market conditions, as both the United States (US) and Canada observe the Labor Day holiday, leading to thinner liquidity and muted volume flows. Despite the calm, the pair’s reversal highlights shifting near-term sentiment, with traders reassessing positions following last week’s decline in the US Dollar.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is stabilizing after briefly touching a five-week low. The index is holding firm above 97.50 as US Treasury yields hold steady and traders look ahead to a busy macro calendar later this week.
Broader sentiment around the US Dollar remains fragile, as traders weigh a mix of macroeconomic and political headwinds. Concerns over US protectionist trade policy, coupled with mounting political pressure on the Federal Reserve’s (Fed) independence, continue to cloud the central bank’s monetary policy trajectory. Expectations for a rate cut remain firmly anchored, with markets pricing in nearly a 90% probability of a 25 basis point reduction at the September 16-17 FOMC meeting, according to CME’s FedWatch Tool.
Friday’s PCE inflation data offered a mixed picture — headline inflation remained steady, while core PCE ticked higher, complicating the policy outlook. Still, investors are increasingly focused on the labor market, where cooling hiring momentum and subdued wage growth are seen as a more immediate risk to the economy than lingering inflation.
This week’s calendar is stacked with high-impact releases. The manufacturing Purchasing Managers' Index (PMI) for both the US and Canada is due on Tuesday. In the US, JOLTS Job Openings (July) on Wednesday, Initial Jobless Claims on Thursday, and the Nonfarm Payrolls (NFP) report on Friday will be closely watched for confirmation of labor market softening. Meanwhile, Canada’s August employment report, also scheduled for Friday, will be key in shaping expectations for the Bank of Canada’s (BoC) September 17 policy decision, particularly after Q2’s surprise GDP contraction reignited speculation over further interest rate cuts.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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