USD/CAD rises to near 1.3800 due to Fed’s cautious policy outlook
- USD/CAD rises as the Fed signals a gradual approach to cutting borrowing costs in the coming months.
- The Fed’s “dot plot” projects two additional rate cuts for this year.
- The Canadian Dollar could gain support as August Retail Sales estimates ease concerns of a sharp BoC rate cut cycle.
USD/CAD recovers its recent losses, trading around 1.3800 during the Asian hours on Monday. The US Dollar (USD) gains ground against its peers as the Federal Reserve (Fed) indicated no rush to lower borrowing costs quickly in the coming months after delivering a widely anticipated quarter-basis-point rate cut last week.
The US Dollar Index (DXY), which measures the value of the US Dollar against six major currencies, is gaining ground and trading around 97.70 at the time of writing. Traders will likely observe the upcoming Personal Consumption Expenditures (PCE) Price Index later this week, the Federal Reserve’s preferred inflation gauge, which is expected to signal subdued price pressures.
Fed Chair Jerome Powell justified the cut rate after holding them steady since December amid growing signs of weakness in the labor market, along with concerns over tariff-driven inflation. Moreover, Powell also said that he doesn't feel the need to move quickly on rates and that the Fed is in a meeting-by-meeting situation regarding the outlook for interest rates. The Fed's rate projection, or the so-called "dot plot," showed a forecast of two more rate cuts this year.
The Canadian Dollar (CAD) may gain support as advance estimates showed August retail sales rising 1.0%, offsetting July’s 0.8% drop and easing concerns of a sharp Bank of Canada (BoC) easing cycle. The Canadian central bank cut its benchmark rate by 25 bps to 2.50% last week as the labor market has weakened further, underlying inflationary pressures have eased, and Canada’s withdrawal of most retaliatory tariffs has lowered upside risks to inflation.
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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