USD/CAD depreciates to near 1.3650 due to dovish sentiment surrounding the Fed
- USD/CAD depreciates as the Fed is highly expected to reduce rates in September.
- Fed Governor Christopher Waller stated that the US central bank is ‘getting closer’ to a rate cut.
- Lower WTI prices limit the upside of the commodity-linked Canadian Dollar.
USD/CAD retraces its recent gains from the previous session, trading around 1.3670 during the European session on Thursday. This downside is attributed to growing expectations of the Federal Reserve (Fed) reducing interest rates in September.
On Wednesday, Fed Governor Christopher Waller said that the US central bank is ‘getting closer’ to an interest rate cut. Meanwhile, Richmond Fed President Thomas Barkin stated that easing in inflation had begun to broaden and he would like to see it continue,” per Reuters.
According to CME Group’s FedWatch Tool, markets now indicate a 93.5% probability of a 25-basis point rate cut at the September Fed meeting, up from 69.7% a week earlier.
However, the decline in crude Oil prices limits the upside of the commodity-linked Canadian Dollar (CAD), given the fact that Canada is the biggest Oil exporter to the United States (US). West Texas Intermediate (WTI) Oil price trades around $81.30 per barrel at the time of writing.
Despite the dovish sentiment surrounding the Fed regarding its policy stance, the US Dollar (USD) rebounds due to increased risk aversion. This might have put pressure on Oil prices.
However, WTI price gained ground in Thursday’s Asian session, driven by a bigger-than-expected decline in crude stocks in the United States, the world's largest oil consumer.
The US Energy Information Administration (EIA) released the US Crude Oil Stocks Change on Wednesday, reporting a decrease of 4.87 million barrels for the week ending July 12. This decline exceeds the expected drop of 0.80 million barrels and the previous decrease of 3.443 million barrels.
The softer Canadian inflation readings have spurred expectations that the Bank of Canada (BoC) would cut interest rates further next week, which may put a cap on the upside of the Canadian Dollar (CAD).
(This story was corrected on July 18 at 11:20 GMT in the fifth paragraph to say "the US Dollar (USD) rebounds due to increased risk aversion", not US Treasury yields.)
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
