The USD/CAD pair trades in negative territory for the fourth consecutive day around 1.3730 during the early European session on Thursday. The extra decline of the Greenback due to the dovish stance of the US Federal Reserve (Fed) drags the pair lower. Investors will take more cues from the weekly US Initial Jobless Claims ahead of the key Canadian employment report on Friday.
The markets raise their bets that the Fed will take action more aggressively on the interest rate in its upcoming meeting in September. The growing expectation of Fed deeper rate cuts might exert selling pressure on the US Dollar (USD) for the time being. Wells Fargo analysts are now forecasting two 50 basis points (bps) rate cuts at the FOMC meetings in September and November.
On the Loonie front, the Bank of Canada (BoC) Summary of Deliberations from the July 24 meeting that was published on Wednesday indicated that the Canadian central bank is concerned about the country’s economic outlook, particularly consumer spending in the coming years. The governing council stated that there was a “clear consensus” that if inflation continued to return to the 2% target, “it would be appropriate to lower the policy rate further.” BMO and CIBC analysts forecast further rate reduction of 75 basis points in 2024, or a quarter-point cut at each remaining meeting this year.
Market players await the employment report from Statistics Canada on Friday for fresh catalysts. The Canadian economy is estimated to add 22.5K jobs in July, while the Unemployment Rate is estimated to tick higher to 6.5% in July from 6.4% in June.
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.
