USD/CAD remains subdued near 1.3750 due to rising Oil prices, weaker US Dollar
- USD/CAD struggles as the commodity-linked CAD receives support from improved Oil prices.
- The BoC is expected to deliver a 25-basis-point rate cut on Wednesday.
- The US Dollar faces challenges as traders expect the Fed to lower rates by 25 basis points in September.
USD/CAD continues to lose ground after registering nearly 0.5% losses in the previous session, trading around 1.3770 during the Asian hours on Tuesday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) could have received support from the improved Oil prices. WTI price received support after a potential supply disruption from Russia following Ukrainian drone attacks on its energy infrastructure and mounting US pressure on buyers of Russian crude.
Markets are pricing in a 25-basis-point rate cut by the Bank of Canada (BoC) on Wednesday. Expectations for BoC easing have increased after data showed a loss of roughly 65,500 jobs in August and a rise in the unemployment rate to 7.1%. Traders will likely observe Canada’s Consumer Price Index (CPI) data due on Tuesday, which could influence the central bank’s policy outlook.
The US Dollar (USD) depreciates against its peers as traders expect the US Federal Reserve (Fed) to lower rates by 25 basis points at its September meeting due on Wednesday. However, there remains a slight chance of a 50-basis-point cut, with markets factoring in continued easing through 2026 to help stave off a potential recession.
Traders will also likely observe the Fed’s Summary of Economic Projections (SEP), the ‘dot plot,’ where each member of the Federal Open Market Committee (FOMC) expects the federal funds rate in the near future.
Markets are broadly expecting the Fed to deliver three straight 25 basis-point interest rate cuts through the end of the year. Morgan Stanley and Deutsche Bank now expect the US central bank to deliver three rate cuts this year, after recent data pointed to easing inflation pressures. Both brokerage firms projected on Friday a 25-basis-point rate reduction at each of the Fed’s remaining meetings in September, October, and December, according to Reuters.
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.