USD/CAD holds below 1.3800 as weaker US job data fuels Fed rate cut expectations
- USD/CAD drifts lower to near 1.3780 in Monday’s early European session.
- Soft US job data fuels Fed rate cut bets, undermining the US Dollar.
- Lower crude oil prices might drag the commodity-linked Loonie lower and cap the downside for the pair.
The USD/CAD pair trades on a softer note around 1.3780 during the early European trading hours on Monday. The Greenback edges lower against the Canadian Dollar (CAD) due to the weaker-than-expected US July job data. Investors will take more cues from the US ISM Services Purchasing Managers Index (PMI), which is due later on Tuesday.
The US Nonfarm Payrolls (NFP) rose by 73,000 in July, versus a 14,000 increase (revised from 147,000) prior, according to the US Bureau of Labor Statistics (BLS) on Friday. This reading came in worse than the estimations of 110,000. Meanwhile, the US Unemployment Rate climbed to 4.2% in July from 4.1% in June, as expected. The US ISM Manufacturing PMI also came in weaker than projected, dropping to 48.0 in July from 49.0 in June.
Fed funds futures traders ramped up bets on rate cuts again on Friday after the downbeat US economic data, which created a headwind for the US Dollar (USD). Markets are now pricing in a nearly 95% possibility that the US Federal Reserve (Fed) will ease rates in September after the weaker-than-expected jobs data, with over 63 basis points (bps) worth of reductions expected by December.
On the other hand, crude oil prices slumped after the Organization of Petroleum Exporting Countries and allies (OPEC+) announced plans to boost oil production by 547K barrels per day (bps) for September as concerns mount over potential supply disruptions linked to Russia. This, in turn, could weigh on the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
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
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
