USD/CAD weakens below 1.3850 amid renewed concerns over Fed's independence
- USD/CAD softens to around 1.3835 in Wednesday’s early Asian session.
- Trump said he’ll have a Fed majority soon to push rates lower.
- Traders raise their bets that the BoC would deliver a rate reduction at the next policy decision.
The USD/CAD pair loses ground to near 1.3835 during the early Asian session on Wednesday. The US Dollar (USD) weakens against the Canadian dollar (CAD) amid fears over the Federal Reserve’s (Fed) independence after US President Donald Trump announced he was firing a Fed Governor Lisa Cook.
Trump said on Tuesday that he will soon have a “majority” of his own nominees on the Fed board of governors who will back his desire to cut the interest rates. These comments came hours after he took the unprecedented move to fire Fed Governor Lisa Cook. In response, Cook said Trump has no authority to fire her from the central bank, and she will not resign. Trump’s decision to fire Cook renewed concerns over the central bank's independence and exerted some selling pressure on the Greenback.
Trump also once again criticized Fed Chair Jerome Powell for not lowering interest rates, although he has stopped issuing threats to fire him ahead of the end of his term in a little under nine months. According to CME's FedWatch tool, traders are now pricing in nearly an 85% chance of a rate cut at the Fed's next meeting.
Meanwhile, a rise in crude oil prices might support the commodity-linked Loonie and create a headwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
Financial market believes the Bank of Canada (BoC) would deliver a rate reduction at the next policy decision in September after data last week showed a sharp deceleration in 3-month annualized measures of underlying inflation that are closely watched by the Canadian central bank. Dovish tone from the BoC could drag the CAD lower and cap the downside for the pair.
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.