USD/CAD maintains position above 1.3650 as traders adopt caution ahead of Fed decision
- USD/CAD holds losses as the US Dollar struggles ahead of the Fed’s policy decision.
- The US Fed is widely expected to keep interest rates unchanged at 4.5% on Wednesday.
- Canadian PM Carney and Trump had agreed to work toward finalizing a new economic and security deal within 30 days.
USD/CAD edges lower after losing over 0.5% in the previous session, trading around 1.3660 during the Asian hours on Wednesday. The pair holds losses as the US Dollar (USD) loses ground ahead of the US Federal Reserve’s (Fed) interest rate decision due later in the day.
Traders expect the Fed to keep the interest rate unchanged at the June meeting, with a nearly 80% probability of a Fed rate cut each in September and October, per Reuters. Moreover, the Federal Open Market Committee’s (FOMC) statement regarding monetary policy will be observed to gain forward guidance amid persistent tariff uncertainty and rising geopolitical tensions.
On the data front, US Retail Sales fell by 0.9% in May, worse than the expected 0.7% decline and April’s 0.1% decrease (revised from +0.1%). Meanwhile, Industrial Production also declined by 0.2%, against the 0.1% increase, swinging from the previous 0.1% growth. Market participants will likely gauge Initial Jobless Claims for the last week, Housing Starts, and Building Permits on Wednesday.
However, the USD/CAD pair received support as the US Dollar appreciated due to increased safe-haven demand amid rising geopolitical tensions in the Middle East. Israel is likely to escalate its attacks on Iran, while the United States (US) is considering expanding its role in the conflict. On Tuesday, US President Donald Trump stated that he wants a permanent end to Iran's route to nuclear weapons after his early departure from the G-7 meeting in Canada.
Canadian Prime Minister Mark Carney and President Donald Trump had met on the sidelines of a G7 summit in Alberta. Carney surprisingly stated that he and President Trump agreed that their two nations should try to wrap up a new economic and security deal within 30 days. However, a few hours earlier, Canadian officials noted that both countries still had plenty of work before they could sign a trade agreement.
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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