USD/CAD rebounds toward 1.3800 as US Dollar firms, PMIs data in focus
- USD/CAD rebounds toward 1.3800 as the Canadian Dollar weakens for a second day.
- The US Dollar Index climbs to 98.50, up nearly 0.85%, with the Greenback's strength underpinned by rising treasury yields.
- US and Canadian manufacturing PMIs are due later today, with investors watching for signals on factory momentum, labor demand, and inflation pressures.
The Canadian Dollar (CAD) loses ground for the second straight day on Tuesday, with USD/CAD rebounding from near four-week lows as the US Dollar (USD) strengthens broadly. The Greenback’s recovery is underpinned by rising US Treasury yields and a global bond sell-off led by UK Gilts, which has spilled over into North American markets and lifted demand for the USD.
At the time of writing, USD/CAD is trading near 1.3800, up around 0.40% on the day, after posting an intraday low of 1.3744 and climbing to a four-day high. The advance mirrors the broader rebound in the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies is trading near 98.50, up almost 0.85% on the day after rebounding from one-month lows. The move comes as traders return from the long weekend Labor Day holiday in the United States (US) and Canada.
Attention now turns to a busy economic docket, with both US and Canadian manufacturing surveys due later on Tuesday. In the US, the S&P Global Manufacturing Purchasing Managers Index (PMI) is expected at 53.3 in August, unchanged from July, while the more closely watched ISM Manufacturing PMI is forecast to rise modestly to 49.0 from 48.0, still below the 50 threshold. Traders will also parse the Employment, New Orders, and Prices Paid sub-indices for insights into labor demand, factory activity, and inflationary pressures.
In Canada, the S&P Global Manufacturing PMI will also be released, following July’s reading of 46.1, which marked a sixth straight month of contraction. The data will provide further clarity on the health of Canada’s manufacturing sector, already under pressure from trade headwinds and weaker domestic demand.
Looking further ahead, markets will shift their focus to Friday’s twin labor market reports. In the US, the Nonfarm Payrolls (NFP) report is widely expected to be pivotal for the Federal Reserve’s (Fed) September monetary policy decision, with traders watching closely to determine whether a 25 basis point cut is delivered or if a larger move remains on the table. Meanwhile, Canada’s August employment report, also due Friday, will be critical in shaping expectations for the Bank of Canada’s (BoC) September 17 policy meeting, particularly after the unexpected contraction in Q2 GDP reignited speculation about further rate cuts.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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