USD/CAD weakens to near 1.3750 as expectations mount of Fed rate cut
- USD/CAD trades in negative territory near 1.3755 in Thursday’s early Asian session.
- Investors priced in near certainty the Fed would ease rates next month.
- Some BoC members wonder whether the central bank has already cut its rate enough to support the Canadian economy.
The USD/CAD pair extends the decline to around 1.3755 during the early Asian session on Thursday. The US Dollar (USD) softens against the Canadian Dollar (CAD) as investors continue to price in further rate cuts by the US Federal Reserve (Fed). The US Producer Price Index (PPI) report will take center stage later on Thursday, followed by the weekly Initial Jobless Claims.
The US July Consumer Price Index (CPI) inflation reading increased expectations of a Fed rate reduction at the September meeting, exerting some selling pressure on the Greenback. The US CPI increased marginally in July, the US Bureau of Labor Statistics (BLS) showed Tuesday, in line with forecasts. The annual core CPI climbed by 3.1% in July, versus the 2.9% rise prior, and beat the estimates of 3.0%.
Fed funds futures traders are now pricing in nearly a 94% chance of a 25 basis point (bps) cut at the September meeting, up from 85% odds before the inflation data release, according to the CME’s FedWatch tool.
Additionally, the concerns over the Fed's independence might contribute to the USD’s downside. Reuters reported on Tuesday that White House spokeswoman Karoline Leavitt said that US President Donald Trump was considering a lawsuit against Fed Chair Jerome Powell due to his management of renovations at the central bank's Washington headquarters.
The Bank of Canada (BoC) on Wednesday released the summary of deliberations from the September meetings leading up to its decision to hold the policy rate steady at 2.75%. Some BoC members were wondering last month whether the central bank’s benchmark interest rate is already low enough to support the Canadian economy through US tariffs.
BoC policymakers said in deliberations that the impact of US tariffs on inflation “appeared to be modest so far,” but those effects were just beginning to show up in the data. However, the BoC will get a fresh look at inflation figures for July and August ahead of its September 17 interest rate decision.
Meanwhile, a decline in crude oil prices might weigh on the commodity-linked Loonie and help limit the pair’s losses. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
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.
