USD/CAD remains under selling pressure below 1.3600 as Fed Minutes point to September rate cut

USD/CAD weakens near 1.3585 in Wednesday’s early Asian session.
Firmer expectations of a Fed rate cut in September after the FOMC Minutes have exerted some selling pressure on the USD.
The recent Canadian CPI supported the case for another rate cut by the BoC.

Lallalit Srijandorn FXStreet

The USD/CAD pair edges lower to 1.3585 during the early Asian session on Thursday. The Greenback remains under selling pressure as the Minutes of the US Federal Reserve (Fed) opened the door for an interest rate cut at its September meeting,

According to the minutes of the Fed’s July meeting, “the vast majority” of participants observed that, if the data continued to come in about as expected, it would likely be appropriate to cut the interest rate at the next meeting.

Markets are now fully pricing in a September cut, which would be the first reduction since the emergency easing in the early days of the Covid crisis. A full percentage point worth of rate cuts is expected by the end of this year. The growing expectation of a Fed rate cut continues to undermine the US Dollar and US Treasury bond yields.

Elsewhere, the US Bureau of Labor Statistics announced on Wednesday that Nonfarm-Payrolls (NFP) growth revised down by 818,000 from March 2023 to March 2024, fewer than previously estimated.

On the Loonie front, the softer Canadian Consumer Price Index (CPI) inflation reports have triggered the speculation of another rate cut by the Bank of Canada (BoC). Traders continue to fully price in a 25 basis points (bps) cut in September, while an additional 50 bps of easing is priced in for the final two meetings of the year. This, in turn, might weigh on the Canadian Dollar (CAD) and help limit USD/CAD’s losses.

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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