USD/CAD refreshes almost three-month high near 1.3880 ahead of flash US PMI
- USD/CAD posts a fresh three-month high near 1.3880 as the US Dollar trades higher ahead of flash US S&P Global PMI data.
- Economists expect the US PMI to have grown moderately.
- This week, the major trigger for the US Dollar will be Fed Powell’s speech at JH Symposium.
The USD/CAD pair trades firmly near a fresh almost three-month high around 1.3880 during the European trading session on Thursday. The Loonie pair demonstrates strength as the US Dollar (USD) trades firmly ahead of the preliminary United States (US) S&P Global Purchasing Managers’ Index (PMI) data for August, which will be published at 13:45 GMT.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to the weekly high near 98.40.
The PMI report is expected to show that the overall business activity at a moderate pace. The Services PMI is estimated to come in lower at 54.2 from 55.7 in July.
This week, the major trigger for the US Dollar will be US Dollar will be Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium on Friday. Investors will pay close attention to Jerome Powell’s speech to get cues about whether the US central bank will cut interest rates in the September policy meeting.
According to the CME FedWatch tool, there is an almost 81.6% chance that the Fed will cut interest rates by 25 basis points (bps) to 4.00%-4.25% in the September meeting.
Meanwhile, the Canadian Dollar (CAD) trades lower on expectations that the Bank of Canada (BoC) could reduce interest rates in the September policy meeting. Analysts at Bank of America (BofA) said the BoC to implement a 25-basis-point (bp) interest rate cut at its September 17 meeting, citing below-target headline inflation and weak core inflation momentum.
This week, investors will focus on the Canadian Retail Sales data for June, which will be published on Friday.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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