USD/CAD weakens near 1.3500 as Fed chief Powell signals rate cut for September
- USD/CAD remains on the defensive at 1.3510 in Monday’s Asian session.
- Powell’s dovish speech in Jackson Hole weighs on the US dollar.
- Canadian retail sales fell 0.3% MoM in June (vs. -0.8%), in line with market sentiment.
The USD/CAD pair is under selling pressure at around 1.3510 during Asian trading hours on Monday. The US dollar (USD) is falling after US Federal Reserve (Fed) Chairman Jerome Powell signaled that the time for interest rate cuts would come from September.
Most Fed officials issued a dovish stance and supported rate cuts in September. This, in turn, undermines the greenback overall in the coming meetings. Fed Chairman Powell noted, “It is time to adjust policy.” Powell further stated, “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the allocation of risks.”
Meanwhile, Philadelphia Fed President Patrick Harker stressed that he supports two or three rate cuts in 2024 unless there is a significant change in U.S. economic data. Chicago Fed President Austan Goolsbee stated that monetary policy is currently at its most restrictive level and the Fed’s focus is now shifting to fulfilling its employment mandate. According to the CME FedWatch tool, traders have now fully priced in a 25 basis point (bp) rate cut in September, while the probability of a deeper cut is at 36.5%, up from 24% last week.
Data released by Statistics Canada showed that Canadian retail sales declined 0.3% MoM in June, after falling 0.8% in the previous reading, in line with market consensus. Retail sales excluding automobiles unexpectedly rose 0.3% MoM in June, beating estimates of a 0.2% decline. Market participants will keep an eye on Canada’s second-quarter gross domestic product (GDP) on Friday. Meanwhile, the Bank of Canada (BoC) is expected to cut another 75 basis points (bps) by year-end.
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.
