USD/CAD strengthens to near 1.3800 as BoC rate cut bets rise
- USD/CAD gathers strength to around 1.3795 in Wednesday’s early European session.
- BoC is expected to cut rates in September due to sharper-than-anticipated economic contraction in Q2.
- Rising debt piles in many major economies boost the safe-haven flows, benefiting the US Dollar.
The USD/CAD pair trades in positive territory for the third consecutive day near 1.3795 during the early European session on Wednesday. The Canadian Dollar (CAD) edges lower against the Greenback as traders weigh the prospects of a Bank of Canada (BoC) interest rate cut this month. The US JOLTS Job Openings and the Fed Beige Book will be in the spotlight later on Wednesday.
Markets signal a BoC rate cut is now more likely as tariffs continue weighing down the Canadian economy. Traders are now pricing in nearly a 55% chance that the Canadian central bank will cut rates in its next decision, up from around a 40% chance last week, according to Reuters.
Following the anticipated September rate cut, BofA analysts expect the BoC to reduce interest rates by another 25 basis points (bps) in October and December, bringing the terminal rate to 2.0%. Rising BoC rate cut expectations this year could undermine the CAD and create a tailwind for the pair in the near term.
The global bond market sell-off is fueling risk aversion, supporting safe-haven currencies like the US Dollar (USD). Investors are concerned about rising debt piles in many major economies. “The risk-off sentiment today is broader market unease stemming from the bond market,” said Marija Veitmane, head of equity research at State Street Markets.
However, a rise in crude oil prices might support the commodity-linked Loonie and cap the upside for the pair. 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.
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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