Canadian Dollar recedes after Fed rate hold

The Canadian Dollar lost further ground on Wednesday, falling for a fifth straight session.
The Loonie buckled under the weight of a rising Greenback as the Fed tempers rate cut hopes.
A US-Canada trade deal outside of the already-existing USMCA is looking increasingly unlikely.

Joshua Gibson FXStreet

The Canadian Dollar (CAD) shed further weight against the US Dollar (USD) on Wednesday, with Loonie flows further hobbled by a broad-market step back into the safe haven Greenback. The Federal Reserve (Fed) kept interest rates on hold, as most investors had expected, but Fed Chair Jerome Powell struck a notably cautious tone, knocking back hopes for a rate cut in September.

Ongoing weakness in the Canadian Dollar has pushed the USD/CAD pair back into the top of the charts, bolstering the pair back above 1.3800 for the first time since May. The pair has broken through near-term technical levels around 1.3750, and the next challenge for Greenback bulls (or Loonie sellers) will be to muscle USD/CAD back over the 200-day Exponential Moving Average (EMA) near 1.3900.

The Bank of Canada (BoC) also held interest rates steady earlier Wednesday, taking further wind out of CAD traders’ sails. Citing ongoing inflation risks from non-energy goods and ongoing global trade tensions, the BoC has been pushed back into a ongoing wait-and-see approach as the Canadian government waits to see what will transpire following US President Donald Trump’s vows to reinstitute sweeping tariffs after August 1.

Daily digest market movers: Central banks dominate the financial landscape on Wednesday

The Canadian Dollar accelerated into further losses against the Greenback, falling over one-half of one percent on the day and chalking in a fourth straight losing session against the US Dollar.
The Fed kept interest rates on hold on Wednesday, as markets broadly expected.
The odds of a Fed rate cut in October were decimated following cautious statements from Fed Chair Jerome Powell, and rate markets are now hopeful for a quarter-point interest rate cut in October.
The BoC remains in a similar wait-and-see stance as multiple countries await to see how tariff impacts will unfold in headline economic data in the months to come.
BoC's Macklem: US trade policy remains unpredictable

USD/CAD daily chart

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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