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16 Sep 2024
USD/CAD remains below 1.3600 due to improved risk sentiment
- USD/CAD depreciates due to risk-on mood amid rising odds of a bumper 50 basis points rate cut by the Fed.
- CME FedWatch Tool suggests the likelihood of a 50 basis points Fed rate cut increasing to 59.0%.
- Lower Oil prices might have put downward pressure on the commodity-linked Canadian Dollar.
USD/CAD edges lower to near 1.3580 during the early European hours on Monday as the US Dollar (USD) received downward pressure amid the rising likelihood of the US Federal Reserve opting for an aggressive 50 basis points rate cut at its upcoming monetary policy meeting scheduled for Wednesday.
According to the CME FedWatch Tool, markets anticipate 41.0% odds of a 25 basis point (bps) rate cut by the Fed at its September meeting. The likelihood of a 50 bps rate cut has increased to 59.0%, up from 50.0% a day ago.
Additionally, lower US Treasury yields contribute to the downward pressure for the Greenback. The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades around 100.70 with 2-year and 10-year yields on US Treasury bonds standing at 3.55% and 3.64%, respectively, at the time of writing.
On the CAD front, lower crude Oil prices might have put downward pressure on the Loonie Dollar and limit the downside of the USD/CAD pair. West Texas Intermediate (WTI) Oil price remains subdued around $68.40 per barrel at the time of writing. Concerns over slowing fuel demand in the world's largest Oil importer resurfaced following a series of disappointing Chinese economic data over the weekend, putting pressure on Oil prices.
Additionally, the Canadian Dollar (CAD) may weaken due to growing expectations of further interest rate cuts by the Bank of Canada (BoC). Traders will likely to monitor Canada's Consumer Price Index (CPI) data for August, scheduled for release on Tuesday. This inflation report could offer fresh insights into the Bank of Canada's outlook ahead of its October policy decision.
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.