USD/CAD extends downside below 1.3700 ahead of Fed’s Powell speech
- USD/CAD weakens to near 1.3680 in Tuesday’s early Asian session.
- Speculation around a possible replacement of Fed Chair Jerome Powell weighs on the US Dollar.
- Lower crude oil prices might help limit the pair’s losses.
The USD/CAD pair extends the decline to 1.3680 during the early Asian session on Tuesday. The renewed concerns over the US Federal Reserve (Fed) independence weigh on the US Dollar (USD) against the Canadian Dollar (CAD). Fed Chair Jerome Powell is set to speak later on Tuesday.
A White House official said that US President Donald Trump is likely to fire Fed Chairman Powell soon. However, Trump denied it in a Truth Social post on Sunday, calling it “typically untruthful.” Investors will closely monitor the prospect that Trump will find a way or a reason to remove Powell before the end of his term next year. Concerns over the Fed’s independence could undermine the Greenback in the near term.
Fed Chair Jerome Powell may be under more pressure from the White House to lower interest rates later this month, but analysts expect a dovish move from the Fed is likely months away. Markets are now pricing in nearly a 59% odds of a rate cut by the US central bank in September, according to the CME FedWatch tool.
Meanwhile, crude oil prices edge lower as investors assess the impact of tariffs on oil demand. Lower 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 a decline in crude oil prices tends 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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