Market Data 
- USD/CAD holds positive ground around 1.3745 in Tuesday’s early European session.
- The Fed’s cautious stance continues to underpin the Greenback, creating a tailwind for the pair.
- Canada’s June S&P Global Manufacturing PMI data and Fed’s Chair Powell speech will be the highlights on Tuesday.
The USD/CAD pair trades on a stronger note near 1.3745 during the early European session on Tuesday. The uptick of the pair is supported by the firmer Greenback and higher US Treasury bond yields. Later in the day, the Canadian S&P Global Manufacturing Purchasing Managers Index (PMI) for June is due, which is estimated to improve to 50.2 from 49.3 in May. Also, Federal Reserve (Fed) Chairman Jerome Powell’s speech will be closely watched.
The weaker-than-expected US ISM Manufacturing PMI for June supported the case that the Fed will cut interest rates in September. Traders are now pricing in nearly 68% odds that the Fed will cut rate in September, up more than 20 percentage points from a month ago, according to the CME FedWatch tool. San Francisco Fed President Mary Daly stated that the US central bank remains data-dependent and didn’t give an estimation of a policy path forward. The cautious tone of the Fed officials continues to underpin the US Dollar (USD) in the near term despite a series of weaker US economic data.
The Bank of Canada (BoC) cut interest rates to 4.75% on June 5, making it the first G7 nation to loosen monetary policy in the current cycle. During the press conference, the BoC governor Tiff Macklem said Canada was in a position to cut rates, but there are limits to how far the BoC can diverge from the Fed, and they are not close to those limits.
“This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means. The Bank’s tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming,” said Douglas Porter, chief economist at BMO Economics.
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.
