USD/CAD holds positive ground above 1.3650 as risk aversion boosts the US Dollar
- USD/CAD gains ground near 1.3655 in Monday’s Asian session.
- The political uncertainty boosts the safe-haven currency, benefitting the US Dollar.
- Prospects of more rate cuts by the BoC weigh on the Loonie, but higher crude oil prices might cap the downside.
The USD/CAD pair trades in positive territory for the third consecutive day around 1.3655 during the Asian trading hours on Monday. The uptick of the pair is bolstered by the firmer US Dollar (USD) amid risk-aversion. However, the upside of the pair might be capped due to growing speculation that the US Federal Reserve (Fed) would start cutting the interest rate in September.
The political uncertainty after the report about a failed assassination attempt on US Presidential candidate Donald Trump lifts the USD, a safe-haven currency. On Saturday, former president Donald Trump was shot in the ear during his rally in Butler, Pennsylvania in an assassination attempt. One spectator was killed in the attack, two others were critically injured and Trump was pictured with blood spilling from his ear, per BBC.
On the other hand, wholesale inflation in the United States rose faster than expected in June, the Bureau of Labor Statistics revealed on Friday. The US PPI rose to 2.6% YoY in June, compared to the previous reading of 2.4%, better than the estimated 2.3%. Meanwhile, the core PPI climbed 3.0% YoY, beating the expectation of 2.5%. On a monthly basis, the PPI increased 0.2% MoM in June, stronger than the forecast of 0.1%.
Despite the hotter inflation data, market players remain focused on the potential of Fed rate cuts, which might exert some selling pressure on the Greenback in the near term. According to the CME Fedwatch Tool, traders have priced in above 90% chance for 25 basis points (bps) cut in September, up from 85% last Friday. Looking ahead, traders will monitor the NY Empire State Manufacturing Index for July and the Fed’s Mary Daly speech later on Monday.
On the Loonie front, the expectation that the Bank of Canada (BoC) will further cut interest rates exerts some selling pressure on the Canadian Dollar (CAD). Meanwhile, the extended gains in crude oil prices might limit the CAD’s potential losses as Canada is the major crude oil exporter to the United States.
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.