In Thursday’s early Asian session, the USD/CAD pair is trading near 1.3805, showing a softening trend. This comes after the Federal Reserve (Fed) decided to keep its key interest rate at 5.25% to 5.5% during its July meeting on Wednesday. The weakening US Dollar (USD) following the Fed’s decision is pushing the pair towards its weekly lows. Investors are now looking towards key economic indicators like the US ISM Manufacturing PMI, weekly Initial Jobless Claims, and the final S&P Global Manufacturing PMI for further direction.
The dovish comments from the Fed and the growing expectations of a rate cut in September are putting pressure on the Greenback. Market players are now pricing in a 100% chance of a 25 basis point rate cut in the Fed’s September meeting. On the other hand, the Canadian Dollar (CAD) is finding support from higher crude oil prices due to escalating geopolitical tensions in the Middle East and a decrease in weekly US crude oil inventories.
However, the CAD’s gains may be limited by the possibility of further rate cuts by the Bank of Canada (BoC) after its recent cut. Traders are speculating on another 25 bps rate cut this year, with a 60% chance of the BoC cutting rates again in September.
Canadian Dollar FAQs
Key factors driving the Canadian Dollar (CAD):
- Interest rates set by the Bank of Canada (BoC)
- Price of Oil
- Health of the Canadian economy
- Inflation
- Trade Balance
Impact of the Bank of Canada (BoC) on the CAD:
- BoC sets interest rates
- Goal to maintain inflation at 1-3%
- Quantitative easing and tightening influence credit conditions
Price of Oil and its impact on the CAD:
- Oil is Canada’s biggest export
- Rising Oil prices tend to strengthen the CAD
Inflation and its effect on the CAD:
- Higher inflation can attract capital inflows
- Increased demand for the CAD
Macroeconomic data and the CAD:
- GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys influence the CAD
- Strong economy attracts foreign investment and may lead to rate hikes
Analysis:
The USD/CAD pair is facing downward pressure as the Fed’s decision to maintain rates and the possibility of future rate cuts weigh on the US Dollar. On the other hand, the CAD is finding support from higher Oil prices but may face limitations due to expectations of further rate cuts by the BoC. Investors should monitor key economic indicators and central bank announcements for future trends in the USD/CAD pair, which can impact their investment decisions and financial strategies.