- USD/CAD is struggling to hold its position after recovering from a five-month low of 1.3498 recorded on Monday.
- The US dollar lost value due to Fed Chairman Powell’s dovish speech at the Jackson Hole Symposium.
- The commodity-dependent CAD could rise further due to higher crude oil prices.
USD/CAD is recovering from its five-month low of 1.3498 recorded on Monday and is currently hovering around 1.3510 during the early European session on Monday. This uptrend could be attributed to the improved US dollar (USD) amid increased risk aversion. However, the greenback could come under downward pressure from the increasing chances of a rate cut by the Federal Reserve (Fed) in September.
The Fed is strongly expected to deliver a rate cut of at least 25 basis points in September. According to the CME FedWatch tool, markets are now fully expecting the Federal Reserve to deliver a rate cut of at least a quarter basis point (bp) at its September meeting.
At the Jackson Hole Symposium on Friday, Fed Chairman Jerome Powell noted: “It is time to adjust policy.” While he did not provide specific details on the timing or extent of possible interest rate cuts, he stressed that labor market risks have increased while inflation risks have decreased.
The commodity-dependent Canadian dollar (CAD) received support from higher crude oil prices. West Texas Intermediate (WTI) extended its gains for the third day in a row and was trading at around $75.20 per barrel at the time of writing. Crude oil prices are rising on increasing supply fears due to geopolitical tensions in the Middle East.
Hezbollah fired hundreds of rockets and drones at Israel on Sunday, prompting the Israeli military to respond by sending around 100 fighter jets to strike Lebanon and prevent a larger attack. The escalation heightens fears that the ongoing Gaza conflict could escalate into a wider regional conflict, potentially involving Hezbollah backer Iran and Israel’s main ally, the United States, according to Reuters.
However, the Bank of Canada’s (BoC) dovish stance on its policy outlook could limit the CAD’s upside and support the USD/CAD pair. The BoC has already started its rate-cutting cycle to address growth concerns and a slowdown in the domestic labor market.
Frequently asked questions about the Canadian dollar
The main factors that affect the Canadian dollar (CAD) are the Bank of Canada (BoC) interest rate level, the price of oil, Canada’s largest export commodity, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and imports. Other factors include market sentiment – whether investors are looking to take on riskier assets (risk-taking) or seek safe havens (risk-averse) – with risk-taking being positive for the CAD. As the largest trading partner, the health of the US economy is also a major factor that affects the Canadian dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian dollar by setting the level of interest rates at which banks can lend money to each other. This affects the level of interest rates for everyone. The BoC’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to have a positive effect on the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former negatively affecting the CAD and the latter positively affecting the CAD.
The price of oil is a major factor that affects the value of the Canadian dollar. Petroleum is Canada’s largest export commodity, so the price of oil usually has a direct impact on the value of the CAD. When the price of oil rises, the CAD generally rises as well, as overall demand for the currency increases. The opposite is true when the price of oil falls. Higher oil prices also tend to lead to a greater likelihood of a positive trade balance, which also supports the CAD.
While inflation has traditionally always been seen as a negative factor for a currency as it reduces the value of money, in modern times with the loosening of cross-border capital controls, the opposite is actually true. Higher inflation tends to cause central banks to raise interest rates, which leads to more capital inflows from global investors looking for a lucrative investment opportunity for their money. This increases the demand for the local currency, in the case of Canada, that is the Canadian dollar.
The release of macroeconomic data is an indicator of the health of the economy and can impact the Canadian dollar. Indicators such as GDP, manufacturing and services purchasing managers’ indices, 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 can also encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is weak, the CAD is likely to fall.
