USD/CAD drifts higher to near 1.3800 ahead of US ISM Services PMI
- USD/CAD edges higher to near 1.3795 in Thursday’s early Asian session.
- BoC is expected to cut rates this month, driven by sharper-than-expected economic contraction in Q2.
- Fed’s Kashkari said policy is in a tricky position as inflation remains high.
The USD/CAD pair extends the rally to around 1.3795 during the early Asian session on Thursday. The prospects of a Bank of Canada (BoC) interest rate cut this month weigh on the Canadian Dollar (CAD) against the US Dollar (USD). The weekly Initial Jobless Claims, the ADP Employment Change, and the ISM Services Purchasing Managers Index (PMI) are due later on Thursday.
The BoC is anticipated to cut the interest rate by 25 basis points (bps) to 2.50% at the September 17 meeting, driven by a sharper-than-expected economic contraction in the second quarter. Following the anticipated September rate cut, BofA analysts expect the BoC to reduce interest rates by another 25 bps in October and December, bringing the terminal rate to 2.0%. Rising BoC rate cut bets this year could drag the CAD lower and act as a tailwind for the pair in the near term.
Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari said on Wednesday that the central bank is facing an increasingly challenging situation as it tries to balance its dual mandates. Kashkari added that Fed policymakers need to monitor tariff-related inflation to determine if inflation will be persistent.
Traders will closely watch the US August jobs data later on Friday, as it might offer some hints about the US interest rate path. Economists project about 75,000 jobs were added in August, while the Unemployment Rate is seen at 4.3%. A surprise downside in labor market data could boost the Fed rate cut bets and cap the upside for the pair.
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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