USD/CAD trades stronger above 1.3500 as Fed’s Powell signals a slow approach to rate cuts
- USD/CAD trades firmer around 1.3525 in Tuesday’s early Asian session.
- Fed’s Powell said the central bank will lower interest rates “over time.”
- The Canadian economy expanded by 0.2% MoM in July, faster than expected; advance estimate indicated that growth likely stalled in August.
The USD/CAD pair gathers strength to near 1.3525 during the early Asian session on Tuesday. The uptick of the pair is bolstered by the stronger US Dollar (USD) after Federal Reserve (Fed) Chair Jerome Powell said the central bank is not in a hurry and will lower its benchmark rate ‘over time.’ Investors await the US ISM Manufacturing Purchasing Managers Index (PMI) for fresh impetus, which is estimated to improve to 47.5 in September from 47.2 in August.
Fed Chair Jerome Powell said on Monday that the recent half percentage point interest rate cut shouldn’t be interpreted as a sign that future moves will be as aggressive, adding that the next moves will be smaller. The remarks came less than two weeks after the US central bank decided to cut the 50 basis points (bps) interest rate.
Fed officials penciled in a half point of further cuts for the remainder of 2024 and a more percentage point of reductions next year, according to the median projections at the September meeting. However, several officials estimated a smaller amount of easing through year’s end, which provides some support to the Greenback.
Canada’s economy grew faster than expected in July but appears to expand at a slower pace in August, raising the expectation of a larger interest-rate cut by the Bank of Canada (BoC) in October. Financial markets expect the Canadian central bank to continue reducing interest rates further due to growing risks to the economy and the labor market, which might exert some selling pressure on the Canadian Dollar (CAD) and create a tailwind for USD/CAD.
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.
