- USD/CAD rose slightly to near 1.3740 in early Asian trading on Friday.
- The recovery of the US dollar is supported by the positive initial claims in the US last week.
- On Friday, Canadian employment data will be in focus.
The USD/CAD pair is trading with slight gains near 1.3740, ending a five-day losing streak during the early Asian session on Friday. The pair’s uptrend is supported by a firmer US dollar (USD) following upbeat initial jobless claims.
Fewer initial jobless claims were received last week than expected, easing some fears about the U.S. labor market. Data released by the Labor Department on Thursday showed that initial jobless claims for the week ended August 3 rose by 233,000, compared with 250,000 the previous week (revised from 249,000), which is below the consensus of 240,000. The positive reading provides some support to the greenback against the loonie.
Markets continue to see a high probability of a half-percentage point cut for the first step and a full percentage point cut by year-end. According to the CME FedWatch tool, traders have priced in a 57.5% probability that the Federal Reserve (Fed) will cut 50 basis points (bps) at the September meeting. Earlier this week, the probability was 83%. An expectation of a deeper rate cut by the Fed is likely to limit the pair’s upside in the near term.
As for the CAD, the Bank of Canada (BoC) decided to cut the benchmark interest rate to 4.5% at its July meeting, hinting at further monetary easing where appropriate. Analysts at BMO and CIBC are forecasting another 75 basis point rate cut in 2024, or a quarter-point cut at each remaining meeting this year. However, traders will be paying more attention to the key Canadian jobs report due later on Friday. The Canadian economy is expected to add 22.5k jobs in July, while the unemployment rate is expected to rise to 6.5% in July from 6.4% in June.
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.
