USD/CAD posts modest losses near 1.3800 amid jumbo Fed rate cut bets
- USD/CAD softens to around 1.3800 in Tuesday’s early Asian session.
- Investors are now pricing in a slight chance of an outsized September Fed cut.
- The US PPI and CPI inflation reports will be in the spotlight later this week.
The USD/CAD pair trades in negative territory near 1.3800 during the early Asian session on Tuesday. Investors continued to assess the latest US Nonfarm Payrolls (NFP) report, while expectations of extra rate cuts by the Federal Reserve (Fed) keep the Greenback under scrutiny. Traders await key US inflation data, which is due later this week.
Friday’s NFP report showed US job growth fell in August, and the Unemployment Rate ticked higher to nearly a four-year high of 4.3%. These figures reinforced expectations that the US central bank will resume cutting interest rates at a policy meeting later this month and weigh on the US Dollar (USD) against the Canadian Dollar (CAD). Fed funds futures are currently pricing in nearly a 90% odds of a 25 basis points (bps) cut this month and a 10% chance of a 50 bps rate reduction, according to LSEG estimates.
Traders will take my cues from the US Producer Price Index (PPI) and Consumer Price Index (CPI) data, which will be released on Wednesday and Thursday, respectively. "We feel there's a chance for a surprise uptick in the dollar, especially if the inflationary figures to arrive in the form of PPI (producer price index) and CPI (consumer price index) paint a picture in which prices are just simply getting out of control," said Juan Perez, director of trading at Monex USA in Washington.
Meanwhile, a rise in crude oil prices might support the commodity-linked Loonie and create a headwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
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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