USD/CAD holds steady below 1.3500 ahead of Fed’s Powell speech

USD/CAD trades flat near 1.3485 in Thursday’s early Asian session.
Dovish Fed might continue to undermine the US dollar in the near term.
BoC’s Macklem said it's reasonable to expect more rate cuts.

Lallalit Srijandorn FXStreet

The USD/CAD pair flatlines around 1.3485 after retracing to 1.3420, the lowest level since March 8, during the early Asian session on Thursday. Investors ponder the Federal Reserve’s (Fed) path of rate cuts and digest US housing market data. The Fed’s Chair Jerome Powell speech will take center stage later in the day.

Traders await fresh catalysts after last week’s jumbo rate cut by 50 basis points (bps) by the US central bank. Fed Governor Adriana Kugler said on Wednesday that she “strongly supported” the central bank’s decision last week, adding that it would be appropriate to cut further rates if inflation continues to ease as expected. The dovish comments from the Fed officials are likely to exert some selling pressure on the Greenback in the near term.

Sales of new homes in the US fell 4.7% MoM to 716,000 in August from a revised 751,000 in July, the Commerce Department reported Wednesday. This figure came in better than the expectations.

Later on Thursday, the Fed’s Susan Collins, Adriana Kugler, Michelle Bowman, John Williams, Michael Barr, Neel Kashkari and Jerome Powell are scheduled to speak. Traders will take cues from the remarks as they might offer some hints about the US interest rate outlook. Also, the US weekly Initial Jobless Claims, Durable Goods Orders and final US Gross Domestic Product (GDP) Annualized for the second quarter (Q2) will be published.

The Bank of Canada (BoC) Governor Tiff Macklem said on Tuesday that the central bank has made in bringing inflation back down to the 2% target, so it is reasonable to expect more rate cuts. The BoC’s next interest rate decision is scheduled for October 23, and the money markets see over 58% possibility of 50 bps rate cuts. Another 25 bps cut is priced in for its last meeting of the year in December.

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

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.

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