USD/CAD edges lower with the focus on events south of the border

USD/CAD edges higher on Tuesday, to trade in the 1.3640s, as it continues its broadly range-bound consolidative market mode of the last three-month period. Most of the emphasis is on the US Dollar side of the pair as traders await Federal Reserve (Fed) Chairman Jerome Powell’s testimony to the Senate Banking Committee, whilst Canada sees no scheduled macroeconomic events until Building Permits are released on Friday. 

Fed Chair Powell is expected to chart a conservative line in his testimony to the Senate on Tuesday, more-or-less repeating the message he made when he spoke in at the central-bankers get together in Sintra. There he eased his stance from strictly data-dependent to admitting that there were now welcome signs inflation was falling, but that more evidence was required to establish that it was significant and sustainable. As such, it is expected he will keep markets guessing as to the timing of the Fed’s next policy move. 

Markets are less ambivalent. The market-based probabilities of the Fed cutting interest rates by 0.25% to an upper band of 5.25% at the September Fed meeting have steadily risen over the past two weeks amid a negative compounding effect from a stream of not-quite-good-enough data releases. Most recently, ISM Services PMI data for June fell into contraction territory, and labor market data for the same month showed the Unemployment Rate rising to 4.1% – the third monthly increase in a row. Although NonFarm Payrolls beat expectations of 190K to register 206K new jobs added, the previous month was revised drastically down. 

Inflation data has also generally come out on the cool side. In the NFP report Average Hourly Earnings remained unchanged from May and met expectations exactly. Prior to that the Fed’s preferred gauge of inflation, the Personal Consumption Expenditures (PCE) Price Index, edged down to 2.6% for both headline and core inflation in May. Before that Consumer Price Index data for May showed prices falling more than expected to 3.3% and core inflation also undershooting to 3.4%. Although both PCE and CPI are still above the Fed’s 2.0% target they are drifting in the right direction. 

As far as Canadian data goes, its labor market seems to be suffering more than the US, as revealed in the Canadian version of the NFP report also released on Friday. This showed the Unemployment Rate rising to 6.4%, surpassing forecasts of 6.3% and marking its highest level since January 2022. Canadian payrolls were even worse, showing a 1.4K fall when economists had expected a 22.5K rise. The stresses in the labor market have been blamed on still-high interest rates in Canada stymying companies ability to access credit. This has led to further calls that the Bank of Canada (BoC) should cut interest rates again, after they reduced the policy rate by 0.25% to 4.75% in June – the first change in interest rates since July 2023.

Since lower interest rates or their expectation is generally negative for a currency all eyes will be on Powell’s comments and when the Fed will make its first move. Otherwise the Canadian Dollar looks more vulnerable as the BoC weighs further rate cuts to stimulate its sagging labor market.