Market Data 
- USD/CAD trades flat around 1.3505 in Thursday’s early Asian session.
- The BoC cut interest rates by 25 bps, bringing its policy rate to 4.25% on Wednesday.
- JOLTS Job Openings fell to their lowest level in three and a half years in July, weighing on the USD.
The USD/CAD pair trades on a flat note near 1.3505 during the early Asian session on Thursday. The Bank of Canada (BoC) cut interest rates as expected, while US Job Openings came in weaker than expected. Traders await the release of US August ISM Services PMI data on Thursday for fresh impetus, which is expected to ease to 51.1 from 51.4 in July.
The Bank of Canada (BoC) decided to cut its benchmark interest rate for the third consecutive time at its September meeting on Wednesday, as widely expected. The BoC governor Tiff Macklem said, “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.”
During the press conference, BoC’s Macklem stated that 25 basis points (bps) cut looked appropriate, adding that he’s not seeing a big impact on the exchange rate from divergence with the US Federal Reserve (Fed) on rates.
Meanwhile, crude oil prices fell to the lowest level in nine months as downbeat US economic data and a sluggish Chinese economy raised concerns about a weaker global economy. It’s worth noting that Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
Data released by the Labor Department on Wednesday reported that the Job Openings and Labor Turnover Survey showed that available positions fell to 7.67 million in July, compared with 7.91 million openings (revised from 8.1 million) seen in June and came in below the market consensus of 8.1 million.
The dovish comments from Atlanta Fed President Raphael Bostic might undermine the USD. Bostic stated that he is ready to start cutting interest rates even though inflation is still running above the US central bank’s target. The markets are now pricing in nearly 57% possibility of a 25 basis points (bps) rate cut by the Fed in September, while the chance of a 50 bps reduction stands at 43%, according to the CME FedWatch tool.
Looking ahead, the US Nonfarm Payrolls (NFP) for August will be released on Friday, which is projected to show an increase of 161,000. This event could offer some hints about the size of the Fed rate cut this year and give a clear trading opportunity to the USD/CAD pair.
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.
