USD/CAD eases from 1.3700 Fed cuts hopes, higher Oil prices
- The US Dollar retreated across the board as the FOMC minutes heightened rate cut hopes for this year.
- Futures markets are pricing a 72% chance of at least a 25 bps rate cut in September.
- A moderate but steady recovery in Crude prices poses additional support to the Loonie.
The US Dollar retreated from two-week highs above 1.3700 on Wednesday, following the release of the FOMC m¡inutes and weighed by falling US Treasury yields. The pair, however, maintains its near-term bullish trend intact, with ¡ownside attempts contained at the upper range of the 1.3600s for now.
The minutes of June’s Federal Reserve meeting highlighted a deep decision between committee members, with most policymakers showing their willingness to ease monetary policy further in the coming months, and two of them calling for a rate cut in July.
The dovish party cited anchored mid and long-term inflation expectations, while assessing that the inflationary effect of Trump’s tariffs will be temporary or modest. The “hawkish” side supports maintaining interest rates at current levels, as the CPI remains above target and upside risks to inflation remain high
Investors ramp up bets of a Fed rate cut in Septenber
Futures markets increased their bets on a near-term rate cut after the release of the minutes. Bets on a July cut remained practically unchanged, slightly above 6%, but the odds for at least 25 bps cuts in September increased to 72% from below 65% ahead of the minutes.
Beyond that, a $39 billion auction of US long-term yields was met with strong demand on Wednesday, which snapped a five-day rally in US Treasury yields and increased negative pressure on the US Dollar.
Regarding the Canadian Dollar, a moderate uptrend in Crude prices, which have appreciated nearly $4 from late June lows, has contributed to supporting the Canadian Dollar in the absence of relevant macroeconomic releases this week.
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.