USD/CAD remains below 1.3850 due to rising odds of multiple Fed rate cuts
- USD/CAD depreciates as the US Dollar faces challenges amid rising odds of a Fed rate cut on Thursday.
- Morgan Stanley and Deutsche Bank expect three Fed rate cuts this year.
- Traders await Canada’s Consumer Price Index release on Tuesday, followed by the BoC’s policy decision on Wednesday.
USD/CAD inches lower after registering small gains in the previous session, trading around 1.3840 during the Asian hours on Monday. The pair faces challenges as the US Dollar (USD) struggles, as a weakening US labor market boosts the likelihood of the US Federal Reserve (Fed) delivering its first rate cut of the year on Thursday.
Traders expect the US Federal Reserve (Fed) to lower rates by 25 basis points at its September meeting, though there remains a slight chance of a 50-basis-point cut. Markets have also factored in continued easing through 2026 to help stave off a potential recession.
Morgan Stanley and Deutsche Bank now expect the US central bank to deliver three rate cuts this year, after recent data pointed to easing inflation pressures. In separate notes on Friday, the brokerages projected 25-basis-point reductions at each of the Fed’s remaining meetings in September, October, and December, per Reuters.
Traders are also keeping their eyes on whether Stephen Miran will be sworn in as a Fed governor before the policy meeting. According to Reuters, citing the Senate schedule set by Republican leaders, the full Senate vote on his confirmation is scheduled for Monday evening.
Focus is on Canada’s Consumer Price Index (CPI) release due on Tuesday, ahead of the Bank of Canada’s (BoC) policy decision on Wednesday. Expectations for BoC easing have increased after data showed a loss of roughly 65,500 jobs in August and a rise in the unemployment rate to 7.1%.
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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