USD/CAD steadies near 1.3750 as weak US data fuel Fed rate cut bets

USD/CAD remains under pressure as the US Dollar falters amid signs of weakness in recent US economic data.
CME FedWatch Tool indicates that markets are pricing in roughly an 89% probability of a Fed rate cut in September.
The recent Canadian labor market data reinforced expectations of the Bank of Canada’s interest rate cuts.

Akhtar Faruqui FXStreet

USD/CAD inches lower after two days of losses, trading around 1.3750 during the Asian hours on Monday. The pair depreciates as the US Dollar (USD) faces challenges amid recent weakening in US economic data, which prompted traders to price in the possibility of more interest rate cuts this year. Markets are now pricing in approximately 89% odds of a Fed rate cut at the September meeting, as per the CME FedWatch tool.

Fed Governor Michelle Bowman said on Saturday that three interest rate cuts will likely be appropriate this year. Bowman added that the apparent weakening in the labor market outweighs the risks of higher inflation to come.

St. Louis Fed President Alberto Musalem said Friday that US economic activity remains stable but warned of potential risks ahead, noting the Fed could fall short on both its inflation and employment goals, with particular downside risks to jobs. Musalem emphasized that the Fed is currently balancing risks on both sides of its mandate and stressed, per Reuters, that data integrity is critically important to the economy.

Traders will likely await the upcoming US consumer inflation figures due to be published on Tuesday, followed by the release of the preliminary UK Q2 GDP print and the US Producer Price Index (PPI) on Thursday. The key data is expected to offer meaningful momentum to spot prices and guide the next phase of the directional move.

The USD/CAD pair may appreciate as the Canadian Dollar (CAD) could struggle with rising expectations of the Bank of Canada’s (BoC) interest rate cuts. The dovish sentiment was reinforced by recent employment data released on Friday. Statistics Canada reports that the Net Change in Employment showed a loss of 40.8K jobs and an unchanged 6.9 % Unemployment Rate in July.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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