USD/CAD oscillates in trading range above 1.3600, investors await Powell’s testimony

July 9, 2024 1:29 am

  • USD/CAD remains capped within a trading range near 1.3635 in Tuesday’s early Asian session. 
  • Loosening US labor market triggered the Fed rate cut expectation this year. 
  • Lower crude oil prices weigh on the Loonie. 

The USD/CAD pair oscillates in a narrow trading range around 1.3635 during the early Asian session on Tuesday. Traders prefer to wait on the sidelines ahead of Powell’s semi-annual testimonies and key US data. Additionally, the Federal Reserve’s (Fed) Michael Barr and Michelle Bowman are set to speak later on Tuesday.

Meanwhile, the USD Index (DXY) hovers around the 105.00 barrier despite lower US bond yields. The recent US employment report for June hinted that the labour market in the United States is cooling sharply, triggering the expectation that the US Fed could lower its borrowing costs sooner than expected this year. This, in turn, is likely to weigh on the Greenback. Investors have priced in nearly 76% odds of a Fed rate cut in September, up from 71% last Friday, according to the CME FedWatch tool. 

On the CAD’s front, weakening Canadian employment on Friday raised expectations for rate cuts from the Bank of Canada (BoC). Canada’s Unemployment Rate rose to 6.4% in June from 6.2% in May, according to Statistics Canada.  

Meanwhile, crude oil prices edge lower in response to growing peace talks in the Middle East, exerting some selling pressure on the commodity-linked Canadian Dollar (CAD) as Canada is the major crude oil exporter to the United States.

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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