USD/CAD falls toward 1.3750 as US Dollar declines on Fed concerns
- USD/CAD depreciates amid rising concerns over Fed independence.
- Fed Governor Cook’s exit could increase the likelihood of interest rate cuts.
- BoC Governor Macklem stated that the central bank will maintain its 2% inflation target for the foreseeable future.
USD/CAD extends its losses for the third successive session, trading around 1.3770 during the Asian hours on Thursday. The pair depreciates as the US Dollar (USD) faces challenges amid rising concerns over the US Federal Reserve’s (Fed) independence. Traders await the Q2 US Gross Domestic Product (GDP) Annualized due later in the day.
US President Donald Trump announced early Tuesday that he was removing Fed Governor Lisa Cook from her position on the Fed's board of directors. He also said that he was ready for a legal fight with Cook over falsified mortgage documents.
The dismissal of Fed Governor Cook could increase the likelihood of heavy interest rate cuts, given Trump’s ongoing pressure on the central bank to reduce borrowing costs. Traders are now pricing in more than 88% odds for a cut of at least a quarter-point at the Fed’s September meeting, up from 82% the previous week, according to the CME FedWatch tool.
China's top trade negotiator Li Chenggang said on Thursday that China and Canada had frank, pragmatic, and constructive exchanges on improving and developing bilateral economic and trade relations. China is ready to manage differences through constructive methods and pragmatic actions.
Bank of Canada (BoC) Governor Tiff Macklem said on Wednesday that the central bank will not reconsider its 2% inflation target in the foreseeable future, citing uncertainty over trade and shifting US tariff policies. Macklem noted that supply-side headwinds could add upward pressure on inflation in the period ahead. He added that by using scenario analysis, the BoC was able to make a monetary policy decision suited to a range of potential economic outcomes.
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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