USD/CAD weakens to near 1.3650 ahead of Canadian employment data
- USD/CAD edges lower to around 1.3655 in Friday’s early Asian session.
- FOMC meeting minutes released on Wednesday showed narrow support for a rate cut as early as this month.
- Canada’s June employment data will be in the spotlight later on Friday.
The USD/CAD pair declines to around 1.3655 during the early Asian session on Friday. The US Dollar (USD) softens against the Canadian Dollar (CAD) amid the prospects for more interest rate cuts by the US Federal Reserve (Fed) this year. Traders will keep an eye on the Canadian employment data for June, which is due later on Friday.
Most participants at the Fed's June 17-18 meeting saw some reduction in the Fed funds rate this year as appropriate, citing that any price shock from tariffs was expected to be "temporary or modest,” according to the FOMC Minutes. Fed policymakers raise their expectations for rate cuts, anticipating two reductions this year and three more over the following several years. However, the "dot plot" of individual members' outlooks reflected division over the extent of cuts.
Fresh US trade tariffs cast doubt on the potential trade agreement between Canada and the US this month. US President Donald Trump on Wednesday announced a new 50% tariff on US copper imports, effective August 1. The Canadian government hopes to reach an agreement with the US by July 21. Any negative developments surrounding US-Canada trade talks could weigh on the CAD and act as a tailwind for the USD, as Canada is a major supplier of copper to the US.
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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