USD/CAD holds positive ground above 1.3750, BoC/ Fed rate decisions in focus
- USD/CAD strengthens to near 1.3750 in Wednesday’s early European session.
- The BoC is expected to resume rate cuts at the September meeting.
- Fed is widely anticipated to cut its benchmark interest rate by 25 bps later on Wednesday.
The USD/CAD pair gains traction to around 1.3750, snapping the two-day losing streak during the early European session on Wednesday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) amid the expectation that the Bank of Canada (BoC) will resume interest-rate cuts later on Wednesday. The Federal Reserve (Fed) and the BoC interest rate decisions will be the highlights later on Thursday.
The BoC is anticipated to lower its policy rate to 2.5% from 2.75% at the September meeting. Over 80% of economists expect the BoC to reduce interest rates by 25 basis points (bps), with many expecting at least one more cut before the end of the year, according to a Reuters poll last week. The BoC Press Conference will be closely watched for how far the easing cycle will eventually extend. The dovish tone of the Canadian central bank could exert some selling pressure on the Loonie.
On the USD’s front, markets expect a 25 basis points (bps) rate cut at the Fed’s September meeting on Wednesday, after the US labor market has shown signs of a slowdown. According to the CME FedWatch tool, traders are now pricing in near 100% odds of a quarter-point rate cut at the upcoming meeting. A small minority even sees a possibility of a jumbo rate cut.
Fed Chair Jerome Powell is set to hold a press conference following the policy statement on Wednesday. Traders will keep an eye on the FOMC Press Conference and a Summary of Economic Projections (SEP), or ‘dot-plot,’ for some hints about the US interest rate path.
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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