USD/CAD weakens to below 1.3750 as traders assess US data releases
- USD/CAD softens to around 1.3740 in Friday’s early Asian session.
- Fed’s Waller said July rate cut justified by rising risks.
- US Retail Sales rose 0.6% MoM in June, stronger than expected.
The USD/CAD pair trades in negative territory around 1.3740 during the early Asian session on Friday. The dovish remark from the Federal Reserve (Fed) officials weighs on the US Dollar (USD). Traders brace for the preliminary reading of the University of Michigan Consumer Sentiment, followed by Building Permits and Housing Starts.
Fed Governor Christopher Waller said late Thursday that he believes that the US central bank should reduce its interest rate target at the July meeting, citing mounting economic risks. Waller added that delaying cuts runs the risk of needing more aggressive action later. Dovish comments from Fed policymakers could undermine the Greenback against the Canadian Dollar (CAD).
Financial markets are now pricing in a September starting date for rate cuts and Fed officials penciled in two reductions at their June meeting, according to Reuters.
On the other hand, stronger-than-expected US Retail Sales might help limit the USD’s losses. Data released by the US Census Bureau on Thursday showed that the US Retail Sales rose by 0.6% MoM in June versus -0.9% prior. This figure came in below the market consensus of 0.1%. On a yearly basis, Retail Sales climbed 3.9% in June, compared to a rise of 3.3% in May.
Meanwhile, a decline in Crude Oil prices could drag the commodity-linked Loonie lower in the near term. It’s worth noting that Canada is the largest oil exporter to the US and lower crude oil prices tend to have a negative 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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