USD/CAD trades with mild gains above 1.3600, Fed cuts rates for first time in four years
- USD/CAD trades in positive territory near 1.3605 in Thursday’s early Asian session.
- The Fed lowered its benchmark interest rate by a half percentage point at its September meeting on Wednesday.
- Both faster rate cuts and slower cuts are on the table, noted the BoC deliberations.
The USD/CAD pair posts modest gains around 1.3605 during the early Asian session on Thursday. Traders continue to assess the Federal Reserve’s (Fed) 50 basis points (bps) interest rate cut in quite a volatile session on Wednesday. Investors will keep an eye on the US weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Existing Home Sales, which are due later in the day.
The Federal Open Market Committee (FOMC) decided to lower the federal funds rate to a range of 4.75% to 5%, the Fed’s first rate cut in more than four years. Fed Chair Jerome Powell said in a press conference following the monetary policy meeting, “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%.”
The US Dollar (USD) initially edged lower after the Fed decision, but pared losses after Chair Jerome Powell finished his press conference. Furthermore, Fed policymakers revised their quarterly economic forecasts, raising the median projection for unemployment by the end of 2024 to 4.4% from the 4% projection in June. Officials again raised their projection for the long-run federal funds rate to 2.9% from 2.8%.
According to a summary of its deliberations, the Bank of Canada (BoC) is carefully assessing both upside and negative risks to the economy in order to determine the pace of interest rate reduction. The deliberations that led to the BoC's September rate cut came several weeks before Tuesday’s inflation data, which showed that the Canadian Consumer Price Index (CPI) rose at an annualised rate of under 2% in August, meeting the central bank target.
Money markets see almost 46% odds of a 50 bps rate cut in October. Softer inflation and rising speculation of additional rate cuts by the BoC are likely to weigh on the Canadian Dollar (CAD) and support the USD/CAD pair in the near term.
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.