USD/CAD drifts lower below 1.3550 as investors await BoC’s Macklem speech
- USD/CAD weakens around 1.3530 in Tuesday’s early Asian session.
- Several Fed officials open the door to further large interest-rate cuts by the end of this year.
- Investors will closely watch the speeches from Fed’s Bowman and BoC’s Tiff Macklem on Tuesday.
The USD/CAD pair edges lower to near 1.3530 during the early Asian session on Tuesday. The weakness of the Greenback drags the pair lower. Investors will keep an eye on the US September Consumer Confidence data, along with the speech from the Federal Reserve's (Fed) Governor Michelle Bowman and the Bank of Canada’s (BoC) Governor Tiff Macklem on Tuesday.
Several Fed officials on Monday left the door open to additional large interest-rate cuts later this year. Chicago Fed President Austan Goolsbee said on Monday that more rate cuts over the next year would help the US central bank achieve a soft landing for the economy and manage inflation without hurting the labor market.
Meanwhile, Atlanta Fed President Raphael Bostic stated that cutting the cycle with a large move will help bring interest rates closer to neutral levels as the risks between inflation and employment become more balanced. Minneapolis Fed President Neel Kashkari said that he expects to lower interest rates by quarter-point moves at each of the central bank’s two remaining meetings this year, per Bloomberg.
The flash reading of the US Purchasing Managers Index (PMI) showed a slight slowdown in manufacturing activity in September, while the service sector continued to fall slowly. The Manufacturing PMI declined to 47.0 in September, a 15-month low, from 47.9 in August, worse than the expectation of 48.5. The Services PMI eased to 55.4 in August versus 55.7 prior, above the market consensus of 55.2.
However, this report provides little to no impact on the USD. The bigger-than-expected Fed rate cut and firmer expectation of additional rate reduction this year might continue to undermine the Greenback against the Canadian Dollar (CAD) in the near term.
The BoC Governor Tiff Macklem is scheduled to speak later on Tuesday. The speech might offer some hints about how much the Canadian central bank will cut interest rates by the year-end. “Now, the Bank of Canada must be careful about over-correcting with a monetary setting that pushes inflation through its target on the downside to any great degree. We estimate for Canada that the ‘neutral’ overnight rate is 2.25 percent, or two full percentage points lower than the current settings,” said TD Economics.
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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