USD/CAD remains below 1.3650 due to dovish sentiment surrounding the Fed
- USD/CAD loses ground as US Dollar faces challenges after weaker-than-expected US employment data released on Friday.
- According to CME's FedWatch Tool, the probability of a Fed rate cut in September has increased to 70.7%, up from 64.1% just a week ago.
- Canada's 10-year government bond yield fell below 3.53%, indicating an accommodative stance by the BoC.
USD/CAD traces back its recent gains, trading around 1.3630 during the Asian session on Monday. This decline is attributed to the lower US Dollar (USD) following weaker-than-expected US employment growth data released on Friday. This has increased the probability of the Federal Reserve’s (Fed) interest rate cuts sooner rather than later.
US Nonfarm Payrolls (NFP) increased by 206,000 in June, following a rise of 218,000 in May. This figure surpassed the market expectation of 190,000. The US Unemployment Rate edged up to 4.1% in June from 4.0% in May. Meanwhile, Average Hourly Earnings decreased to 3.9% year-over-year in June from the previous reading of 4.1%, aligning with market expectations.
According to the CME's FedWatch Tool, rate markets are currently pricing in a 70.7% probability of a rate cut in September, up from 64.1% just a week earlier. The Greenback faced challenges as the Fed Chair Jerome Powell said last week that the central bank is getting back on the disinflationary path, per Reuters.
However, minutes from the Federal Reserve's June monetary policy meeting indicated that Fed officials were adopting a cautious "wait-and-see" approach. Some participants highlighted the Committee's commitment to a data-dependent approach.
In Canada, the Unemployment Rate rose to 6.4% in June, surpassing the expected 6.3% and reaching its highest level since January 2022. This increase highlights concerns from the Bank of Canada (BoC) that high interest rates are putting significant pressure on the job market, prompting calls for potential rate cuts to support economic recovery. Additionally, Canada's 10-year government bond yield dropped below 3.53%, reflecting expectations of a more accommodative stance from the central bank.
The commodity-linked Canadian Dollar (CAD) may see limited gains due to falling crude Oil prices. Canada, a major crude Oil exporter to the United States (US), is observing West Texas Intermediate (WTI) oil trading around $82.40 per barrel at the time of writing. Geopolitical tensions in the Middle East eased with prospects of a ceasefire in Gaza, contributing to the decline in Oil prices.
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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