- USD/CAD trades sideways above 1.3550, with investors focusing on BoC’s Macklem speech and the US CPI data for August.
- BoC Macklem is expected to deliver a dovish interest rate guidance.
- The risk profile is cautious ahead of the US inflation data.
The USD/CAD pair stays in a tight range above 1.3550 in Tuesday’s European session. The Loonie asset struggles for direction as investors have sidelined ahead of the Bank of Canada (BoC) Governor Tiff Macklem’s speech, which is scheduled at 12:25 GMT.
Tiff Macklem is expected to provide guidance about the likely monetary policy action in the last quarter of the year. The interest rate guidance from BoC Macklem is expected to be dovish as the Canadian economy is going through a rough phase due to subdued demand environment. Canadian Unemployment Rate rose at a faster-than-expected pace to 6.6% in August from the estimates of 6.5% and the July’s release of 6.4%.
The BoC has already reduced interest rates by 75 basis points (bps) to 4.25% since June. Financial market participants expect the BoC to cut its borrowing rates further to boost the economic growth.
Meanwhile, the overall market mood is quite cautious as investors await the United States (US) Consumer Price Index (CPI) data for August, which will be published on Wednesday. S&P 500 futures have posted decent losses in the European session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near 101.60.
The US inflation data will significantly influence market speculation for Federal Reserve (Fed) likely interest rate cut size this month. Recent commentary from Fed officials has indicated that the central bank is more focused on preventing job losses as they are confident that inflation is on track to return to the desired rate of 2%. However, the significance of the inflation data has increased as the US Nonfarm Payrolls (NFP) data for August failed to provide a clear case for Fed’s potential interest rate cut size.
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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