- USD/CAD loses ground on dovish comments from Fed officials.
- Fed’s Austan Goolsbee said long-term trends in the labor market and inflation data warrant Fed easing soon.
- The rise of the commodity-linked Canadian dollar could be limited by falling oil prices.
The USD/CAD continues to lose ground for the third consecutive day, trading around 1.3500 during the Asian session on Friday. Traders are likely to look forward to the release of employment data from the United States (US) and Canada on Friday. The US Non-Farm Payrolls (NFP) will be in focus as it could offer more insight into the potential size of an anticipated rate cut by the Federal Reserve (Fed) this month.
The US Dollar (USD) is facing challenges following dovish comments from Federal Reserve (Fed) officials. Chicago Fed President Austan Goolsbee said on Friday that the long-term trend of the labor market and inflation data warrant an easing of Fed interest rate policy soon and then steadily over the next year. FXStreet’s FedTracker, which measures the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10 using a custom AI model, rated Goolsbee’s words as neutral with a score of 3.8.
Additionally, San Francisco Federal Reserve President Mary Daly said Wednesday that “the Fed needs to cut the policy rate as inflation is declining and the economy is slowing.” As for the size of a potential rate cut in September, Daly noted, “We don’t know yet.” Atlanta Federal Reserve President Raphael Bostic said the Fed is in a favorable position, but added that they should not maintain a tight policy stance for too long, according to Reuters.
The upside potential of the commodity-linked Canadian Dollar (CAD) could be limited by falling crude oil prices, especially given Canada’s position as the largest oil exporter to the United States. West Texas Intermediate (WTI) is trading around $68.70 at the time of writing, marking a fresh 2024 low amid demand concerns in both the US and China. However, a delay in OPEC+ oil production increases and a significant drawdown in crude oil inventories could help cushion WTI’s losses.
In Canada, the Net Change in Employment for August is expected to show an increase of 26.5K new jobs, recovering from the previous decline of 2.8K. However, the Unemployment Rate is projected to rise slightly to 6.5%, compared to the previous reading of 6.4%.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. 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) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures 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 confidence surveys can 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 can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
