USD/CAD softens near 1.3550 on bearish US Dollar, investors await BoC’s Macklem speech

USD/CAD

Fxstreet

Sep 19, 2024 11:01 PM

USD/CAD trades on a weaker note around 1.3560 in Friday’s early Asian session.
The speculation of additional rate cuts by the Fed this year continues to undermine the USD.
Higher crude oil prices support the commodity-linked Loonie.

The USD/CAD pair attracts some sellers near 1.3560, snapping the two-day winning streak during the early Asian session on Friday. The Greenback edges lower as investors assessed the prospects of further rate cuts by the US Federal Reserve (Fed) in the months to come. The Bank of Canada (BoC) Governor Tiff Macklem will deliver a speech later on Friday.

The Fed surprised the financial markets with a 50 basis points (bps) rate cut on Wednesday, bringing its target range to 4.75% to 5.00%. Fed Chair Jerome Powell said the move was "strong" but that it was needed as price rises ease and job market concerns grow. The dovish stance of the US Fed and the expectation of additional rate cuts this year could further weigh on the US dollar (USD) in the near term.

Data released by the US Department of Labor (DoL) on Thursday showed that the US weekly Initial Jobless Claims slid to the lowest since May, signaling the labor market remains healthy despite a slowdown in hiring. US citizens that newly applied for unemployment insurance benefits came in at 219K for the week ending September 14. This figure was below the market consensus of 230K and lower than the previous week of 231K (revised from 230K).

On the other hand, the rise in crude oil prices provides some support to the commodity-linked Canadian Dollar (CAD). It's worth noting that Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive impact on the CAD value.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.