USD/CAD rebounds to near 1.3750 ahead of rate decision from Fed, BoC
- USD/CAD appreciates ahead of the interest rate decision from both nations on Wednesday.
- The likelihood of multiple Fed rate cuts this year strengthens after upbeat US Retail Sales data.
- The Canadian Dollar may regain its ground as August inflation data boost the BoC’s cautious mood.
USD/CAD gains ground after two days of losses, trading around 1.3750 during the Asian hours on Wednesday. The pair appreciates as the US Dollar (USD) holds ground ahead of the US Federal Reserve (Fed) policy decision.
Traders expect the US central bank to deliver a 25-basis-point cut on Wednesday, the first reduction since December 2024, with some still hoping for a greater 50-basis-point cut. The Fed’s Summary of Economic Projections (SEP), the ‘dot plot,’ will be eyed, where each member of the Federal Open Market Committee (FOMC) expects the federal funds rate in the near future.
The upside of the USD/CAD pair could be limited as the US Dollar (USD) could weaken amid rising likelihood of multiple Federal Reserve (Fed) interest rate cuts, with strong retail sales and labor data outweighing hotter inflation. Additionally, Morgan Stanley and Deutsche Bank projected 25-basis-point reductions at each of the Fed’s meetings in September, October, and December.
US Retail Sales increased by 0.6% month-over-month in August, following the 0.6% increase (revised from 0.5%) recorded in July, and came in better than the market expectation of 0.2%. Retail Sales Control Group and Retail Sales ex Autos both rose 0.7%, against the expected 0.4% increase. The sales report showed resilient consumer spending despite sticky inflation and a softening labor market.
The Canadian Dollar (CAD) finds support as domestic inflation data boost the cautious sentiment surrounding the Bank of Canada’s (BoC) policy outlook. Alongside signs of economic resilience, the latest inflation figures support a longer restrictive stance and reduce the odds of rapid easing. Markets now expect only a modest 25-basis-point cut on Wednesday.
Headline CPI rose to 1.9% in August from 1.7% in July, missing the 2.0% forecast and staying below the BoC’s 2% midpoint for a fifth straight month. However, trimmed-mean core CPI, its preferred inflation gauge, held near 3.0%, highlighting persistent underlying pressures once volatile items are excluded.
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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