- USD/CAD loses ground due to higher WTI price amid escalating supply fears.
- Israel Defense Forces (IDF) intercepted around 30 “projectiles” that crossed from Lebanon early Monday.
- CME FedWatch Tool suggests a 46.5% chance of a 50-basis point Fed-rate cut in September, against 74.0% a week ago.
USD/CAD continues to lose ground for the seventh consecutive session, trading around 1.3730 during the early hours on Monday. This downside is attributed to the improved Canadian Dollar (CAD) following the higher crude Oil prices, given the fact that Canada is the biggest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price extends its winning streak for the fourth successive day, trading $76.20 per barrel at the time of writing. Crude Oil prices appreciate due to increasing supply concerns amid geopolitical tensions in the Middle East.
ABC News reported that the Israel Defense Forces (IDF) intercepted around 30 “projectiles” crossing from Lebanon into northern Israel early Monday. The IDF stated that some projectiles landed in open areas, and no injuries were reported.
On Saturday, the Israeli incursion into Gaza escalated with an airstrike targeting a school compound, leading to at least 90 fatalities, according to the Gaza Civil Emergency Service. Israel has contested this casualty figure, labeling it as exaggerated. Meanwhile, Hamas has expressed uncertainty about engaging in new ceasefire negotiations on Sunday, as reported by Reuters.
The downside of the USD/CAD pair could be retrained as the US Dollar (USD) receives support as last week’s upbeat US economic data led traders to reduce their expectations for interest rate cuts by the US Federal Reserve. The CME FedWatch Tool indicates a 46.5% chance of a 50-basis point rate cut by the Fed at the September meeting, a significant decrease from the 74.0% probability reported a week ago.
On Sunday, Federal Reserve Governor Michelle Bowman stated that she continues to see upside risks for inflation and ongoing strength in the labor market. Bowman suggested that the Federal Reserve may not be prepared to cut rates at its next meeting in September, according to Bloomberg.
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.
