USD/CAD holds steady above 1.3850 amid rising odds of BoC rate cut
- USD/CAD flat lines around 1.3870 in Thursday’s early Asian session.
- The Fed Minutes noted that almost all participants advocated for maintaining the status quo.
- Investors raise bets on the BoC cutting interest rates over the coming months.
The USD/CAD pair trades flat near 1.3870 during the early Asian session on Thursday. The Canadian Dollar (CAD) steadies against the US Dollar (USD) near an earlier three-month low as the latest Canadian inflation data raised odds that the Bank of Canada (BoC) would resume its easing campaign. The preliminary reading of the US S&P Global Purchasing Managers Index (PMI) reports will be in the spotlight later on Thursday.
According to the minutes of the Federal Open Market Committee’s (FOMC) July 29-30 meeting, most Federal Reserve (Fed) officials highlighted the risk to inflation as outweighing concerns over the labor market at their meeting last month, as tariffs fueled a growing divide among Fed policymakers.
Almost all participants viewed it as appropriate to maintain the benchmark interest rate in the 4.25%–4.50% range and noted that it would take time to have more clarity on the magnitude and persistence of higher tariffs’ effects on inflation.
Traders await the Fed’s annual Jackson Hole symposium later on Friday for clues on the US interest rate path. If Fed Chair Jerome Powell leans dovish on interest rates, this might drag the USD lower against the CAD in the near term.
Traders raise their bets that the BoC would deliver a rate reduction at the next policy decision in September after data on Tuesday showed a sharp deceleration in 3-month annualized measures of underlying inflation that are closely watched by the BoC. This, in turn, could weigh on the Loonie and create a tailwind for the pair.
Markets are now pricing in nearly a 70% odds of a BoC rate cut in September, up from 56% before the Canadian Consumer Price Index (CPI) inflation data. The Canadian central bank has been on hold since lowering its benchmark rate to 2.75% in March.
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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