- USD/CAD loses ground due to rising dovish sentiment surrounding the Fed’s policy outlook.
- Fed’s Bowman urged caution regarding central bank rate cuts, citing inflation indicators above the 2% target.
- The commodity-linked CAD may struggle due to lower crude Oil prices amid investors re-assessing the effectiveness of China’s stimulus plans.
USD/CAD hovers around 1.3430 during the early European hours on Wednesday. The pair received downward pressure following the bumper interest rate cut of 50 basis points by the US Federal Reserve (Fed) last week.
The US Dollar (USD) may depreciate further due to expectations for further rate cuts by the Fed in 2024. According to the CME FedWatch Tool, markets are pricing in around 50% likelihood of a 75 basis point reduction, bringing the Fed's rate to a range of 4.0-4.25% by the end of this year.
Additionally, the lower US Treasury yields contribute to downward pressure for the Greenback. The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trading around 100.30 with 2-year and 10-year yields on US Treasury bonds standing at 3.51% and 3.73%, respectively, at the time of writing.
However, Federal Reserve Governor Michelle Bowman stated on Tuesday that key inflation indicators are still "uncomfortably above" the 2% target, urging caution as the Fed moves forward with interest rate cuts. Despite this, she expressed a preference for a more conventional approach, advocating for a quarter percentage point reduction.
The commodity-linked Canadian Dollar (CAD) could weaken as crude Oil prices face headwinds, with investors re-evaluating the effectiveness of China’s stimulus plans to significantly boost its economy and fuel demand growth in the world’s largest crude importer. West Texas Intermediate (WTI) crude Oil price trades around $71.00 per barrel at the time of writing.
On Tuesday, Bank of Canada (BoC) Governor Tiff Macklem stated that the central bank will closely monitor consumer conditions in Canada, stressing that the timing and pace of future rate cuts will be data-driven. "The timing and pace will be determined by incoming data and our assessment of what those data mean for future inflation," Macklem remarked.
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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