USD/CAD hits fresh three-month highs above 1.3900, focus on Fed Powell’s speech
- USD/CAD has reached its three-month high at 1.3915 on Friday.
- CME FedWatch Tool indicates that markets are pricing a 74% chance of a September rate cut, against 82% on Wednesday.
- Canada’s Industrial Product Price Index climbed 0.7% in July, exceeding expectations of a 0.3% rise, after a 0.5% gain prior.
USD/CAD remains stronger for the fourth successive session, reaching a three-month high at 1.3915 during the Asian hours on Friday. The pair appreciates as the US Dollar (USD) gains ground amid easing odds of a Federal Reserve (Fed) interest rate cut in September. Traders await the Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole Symposium in Wyoming, which could offer fresh clues on the September policy outlook.
According to the CME FedWatch tool, Fed funds futures traders are now pricing in a 75% chance of a rate reduction in September, down from 82% on Wednesday. The rate cut likelihood reduced following the strong Purchasing Managers’ Index (PMI) and rising Initial Jobless Claims data from the United States (US).
The preliminary S&P Global US Composite PMI inched higher to 55.4 in August, from 55.1 prior. Meanwhile, the US Manufacturing PMI rose to 53.3 from 49.8 prior, surpassing the market consensus of 49.5. Services PMI eased to 55.4 from 55.7 previous reading, but was stronger than the 54.2 expected. Moreover, US Initial Jobless Claims rose to 235K for the previous week, an eight-week high and above the consensus estimate of 225K, suggesting some softening in labor market conditions.
The upside of the USD/CAD pair could be restrained as the Canadian Dollar (CAD) may receive support amid a decrease in the scope for further Bank of Canada (BoC) rate cuts. Canada’s Industrial Product Price rose 0.7% month-over-month in July, following a 0.5% gain in June and surpassing market expectations of a 0.3% increase.
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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