USD/CAD remains confined in familiar range above 1.3600, eyes on Powell, Fedspeak

July 10, 2024 12:44 am

  • USD/CAD consolidates near 1.3635 in Wednesday’s early Asian session.
  • Fed’s Powell said ”more good data” could open the door to rate cuts. 
  • The weaker Canadian employment data has spurred the BoC rate cuts expectation. 

The USD/CAD pair remains capped within a narrow trading range around 1.3635 during the early Asian session on Wednesday. Meanwhile, the USD Index (DXY) consolidates its gains past the 105.00 hurdle as traders await the second semi-annual testimony by Federal Reserve (Fed) Chair Jerome Powell, along with speeches by the Fed’sMichelle Bowman and Austan Goolsbee.

On Tuesday, Fed’s Powell delivered the Semi-Annual Monetary Policy Report and responded to questions before the Senate Banking Committee on the first day of his Congressional testimony. Powell said that holding interest rates too high for too long could affect economic growth. He further stated that “more good data” could open the door to interest rate cuts as recent data indicated that the labor market and inflation are continuing to cool. 

The US central bank has kept the Fed’s federal fund rate in a range of 5.25%-5.50% since July of 2023, the highest in 23 years after inflation hit its highest level since the early 1980s. According to data from the CME FedWatch Tool, investors are now pricing in 74% odds of a Fed rate cut in September, up from 71% last Friday. However, the Federal Open Market Committee (FOMC) members at their June meeting indicated just one cut this year. The expectation of a Fed rate cut might exert some selling pressure on the US Dollar (USD) in the near term. 

On the other hand, the weaker-than-expected Canadian labour market data has triggered speculation about the Bank of Canada (BoC) rate cut. The country’s Unemployment Rate rose to 6.4% in June from 6.2% in May. A National Bank economist said that the Unemployment Rate in Canada might hit or exceed 7% this year if the BoC doesn’t make interest rate cuts “sooner than later.”

Elsewhere, crude oil prices decline for the third consecutive day as hurricane-driven supply concerns dwindled and geopolitical jitters remained subdued. Nonetheless, the rebound of oil prices might lift 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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