By Areena Fx- USD/CAD steadies ahead of the US ISM Services PMI release due later in the day.
- The commodity-linked CAD remains under pressure due to the weaker WTI price.
- Traders are turning cautious amid growing concerns about the Fed’s independence.
USD/CAD holds ground after two days of losses, trading around 1.3790 during the Asian hours on Tuesday. The pair moves little as the commodity-linked Canadian Dollar (CAD) struggles amid weaker crude Oil prices. Market participants will likely observe the US ISM Purchasing Managers’ Index (PMI) data later in the North American session.
West Texas Intermediate (WTI) Oil price remains steady after a three-day losing streak, hovering around $65.60 per barrel at the time of writing. Oil prices may further depreciate amid mounting concerns over a potential supply glut after the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, decided to increase production by 547,000 barrels per day in September.
The USD/CAD pair remains steady as traders adopt caution as the market sentiment turns cautious over rising concerns over the US Federal Reserve’s (Fed) independence. Fed Governor Adriana Kugler unexpectedly resigned on Monday. This event has provided US President Donald Trump an earlier-than-anticipated opportunity to influence the central bank. Trump may nominate a replacement potentially more aligned with his calls for lower rates.
However, the upside of the US Dollar (USD) could be limited amid rising odds of an interest rate cut by the US Federal Reserve (Fed) in September, following weaker labor market data that has heightened concerns over the US economic outlook. According to CME’s FedWatch Tool, markets are pricing in a 91.6% chance of a Federal Reserve rate cut next month.
Canadian Dollar FAQs
What key factors drive the Canadian Dollar?
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.
How do the decisions of the Bank of Canada impact 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.
How does the price of Oil impact the Canadian Dollar?
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.
How does inflation data impact the value of the Canadian Dollar?
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.
How does economic data influence the value of 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.