USD/CAD falls to near 1.3800 due to prevailing dovish sentiment surrounding Fed outlook
- USD/CAD depreciates as traders expect the Fed to deliver a rate cut in September.
- US economic figures support the dovish tone surrounding the Fed policy outlook.
- BoC’s trimmed mean inflation held at 3% in June, reducing urgency to accelerate rate cuts.
USD/CAD loses ground after two days of gains, trading around 1.3800 during the Asian hours on Monday. The pair depreciates as the US Dollar (USD) could face further challenges amid the prevailing dovish tone surrounding the US Federal Reserve’s (Fed) policy outlook for September.
Recent US economic data support the case for a Federal Reserve (Fed) rate cut in September. The preliminary Michigan Consumer Sentiment Index fell to 58.6 in August from 61.7 in July, falling short of the expected 62.0 reading. Meanwhile, the US Retail Sales grew by 0.5% month-over-month in July, as expected, against a rise of 0.9% seen in June. Retail Sales Control Group rose by 0.5%, compared to the 0.8% increase prior.
However, traders adopt caution as Trump administration has broadened its 50% tariffs on steel and aluminum imports, including 407 new product codes in the US Harmonized Tariff Schedule. US President Donald Trump also told reporters he intends to issue further announcements on steel tariffs, along with new levies aimed at semiconductor imports.
Canada’s inflation is cooler but not “mission accomplished” as the Bank of Canada’s (BoC) preferred inflation gauge, the trimmed mean, stuck at an elevated 3% in June, giving the central bank little incentive to speed up rate cuts. The BoC reduced the policy rate to 2.75% in July but vowed to proceed cautiously amid persistent service-price stickiness and the need to weigh opposing forces from tariffs and softening demand.
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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