USD/CAD holds steady above 1.3800, Canadian Retail Sales data looms
- USD/CAD flat lines near 1.3800 in Friday’s early European session.
- The Fed cut the rates but signaled little urgency to lower borrowing costs quickly in the coming months.
- The Canadian July Retail Sales report will be in the spotlight later on Friday.
The USD/CAD pair trades on a flat note around 1.3800 during the early European trading hours on Friday. The US Dollar (USD) might receive some support from a less dovish than expected stance from the US Federal Reserve (Fed). Traders await the Canadian Retail Sales data for July for fresh impetus, which is due later on Friday.
The Fed decided to cut the interest rates by 25 basis points (bps) and signaled two more reductions by the end of this year at its September meeting. This is the Fed's first reduction this year and puts the target range for its main lending rate at 4.0% - 4.25%.
Fed Chair Jerome Powell indicated that the latest move to lower interest rates was a risk management cut, adding that he doesn't feel the need to move quickly on rates. A less dovish stance from the US central bank provides some support to the Greenback in the near term.
The Bank of Canada (BoC) surprised markets by cutting its key rate to a three-year low of 2.5% at its meeting on Wednesday, while signaling it could ease further if needed. The divergence in interest rate paths from the BoC and the US Fed could exert some selling pressure on the Loonie as the US central bank offered a far less dovish message after its first rate cut of the year.
Meanwhile, a rise in crude oil prices might lift 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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