- USD/CAD remains on the defensive near 1.3510 in Monday’s Asian session.
- Powell’s dovish Jackson Hole speech weighs on the US Dollar.
- Canadian Retail Sales dropped by 0.3% MoM in June vs. -0.8% prior, in line with the market consensus.
The USD/CAD pair remains under some selling pressure around 1.3510 on Monday during the Asian trading hours. The US Dollar (USD) edges lower after Federal Reserve (Fed) Chair Jerome Powell signalled that time has come for interest rate cuts starting this September.
Most Fed officials delivered dovish messages, supporting the case for rate cuts in September. This, in turn, undermines the Greenback broadly in the precious sessions. Fed’s Powell noted, ”The time has come for policy to adjust.” Powell further stated, “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Meanwhile, Philadelphia Fed President Patrick Harker emphasized that he supports two or three interest rate cuts in 2024, barring any substantial changes to US economic data. Chicago Fed President Austan Goolsbee stated that monetary policy is currently at its most restrictive level, and the Fed’s focus is now shifting towards achieving its employment mandate. According to the CME FedWatch Tool, traders are now fully priced in a 25 basis points (bps) rate in September, while the odds for a deeper cut stand at 36.5%, up from 24% last week.
Data released by Statistics Canada showed that Canadian Retail Sales declined by 0.3% MoM in June from a fall of 0.8% in the previous reading, in line with the market consensus. Retail Sales excluding automobiles, unexpectedly rose by 0.3% MoM in June, better than the estimation of a decline of 0.2%. Market players will keep an eye on the Canadian Gross Domestic Product (GDP) for the second quarter on Friday. Meanwhile, the Bank of Canada (BoC) is expected to cut an additional 75 basis points (bps) by year-end.
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.
