USD/CAD dips to test YTD lows at 1.3650 amid generalised Dollar weakness
- The US Dollar drops across the board as the specter of a US recession returns.
- Weak US data is feeding hopes of a Fed rate cut in September.
- A “hawkish hold” by the BoC provided fresh support for the CAD on Wednesday.
The US Dollar’s recovery has been short-lived. A frail rebound witnessed on Wednesday’s late US market session was capped below 1.3700, and the pair resumed its broader downtrend on Thursday to test year-to-date lows, at 1.3650.
A combination of downbeat US macroeconomic data, investors’ frustration amid a lack of progress on US trade negotiations, the uncertain tariffs scenario, and rising concerns about US debt keeps feeding a “sell America” trade that has hammered the Dollar over the last two months.
Weak US data boosts hopes of Fed easing
US data released on Wednesday revealed an unexpected contraction of the services sector’s activity, and ADP figures showed that private payrolls grew well below expectations in May. These releases challenge the optimistic forecasts for Friday’s Nonfarm payrolls and have revived fears of an upcoming economic recession.
US President Trump urged Fed Chairman Powell to lower interest rates immediately following Wednesday’s figures. This is the last in a series of attacks by the republican leader, which questions the Fed's independence and boosts speculation about a rate cut. In both cases, bad news for the USD.
The CME Fed Watch tool shows a 57% chance that the Federal Reserve will cut rates in September, up from 32% a month ago.
On Wednesday, the Bank of Canada kept interest rates on hold at 2.75%, as widely expected, and warned about tariff uncertainty. Governor Macklem, however,¡ highlighted the positive economic developments and curbed hopes of further rate cuts in the near-term. All in all, a “hawkish hold” that kept the Canadian Dollar’s downside attempts limited.
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.
Recommended Articles
