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28.10.2024 12:18Kamala Harris or Donald Trump? – Rabobank
With only one week to go before the elections, the Harris bounce in the polls is fading, Rabobank’s Senior US Strategist Philip Marey notes.
Donald Trump or Kamala Harris?
“A Trump presidency would likely lead to a universal tariff and even higher tariffs on China. With support from Congress, he would cut taxes, deregulate the economy and reduce immigration.”
“A Harris presidency would be an extension of Biden’s policies with targeted tariffs on China, reducing health care costs and trying to cut taxes for the middle class, while raising them for the wealthy and corporations. However, two new Harris-specific policy plans focus on stopping price gouging in the food industry and dealing with the housing market shortages.”
“Simulations with a macroeconometric model suggest that Trump’s universal tariff would lead to a rebound in inflation. This could stop the Fed’s cutting cycle in its tracks. In contrast, Harris’ policies would lead to a continued decline in inflation to the Fed’s 2% target and allow the Fed to continue its cutting cycle next year.”
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21.10.2024 18:58Forex Today: ECB-speak could unveil some details around the rate path (or not)
The US Dollar accelerated its uptrend and traded at shouting distance from the area of three-month highs on the back of higher yields and the resumption of the “Trump trade” among market participants.
Here is what you need to know on Tuesday, October 22:
The US Dollar Index (DXY) climbed further and came at shouting distance from the key 104.00 barrier helped by rising US yields. The Richmond Fed Manufacturing Index is due along with the speech by the Fed’s Harker.
EUR/USD resumed its deep pullback and approached the 1.0800 region once again on Monday. All the attention will be on the ECB, as Lagarde, McCaul and Lane are all due to speak.
GBP/USD succumbed to the Dollar’s gains and broke below the key support at 1.3000 the figure. Public Sector Net Borrowing figures will be published followed by the speech by the BoE’s Bailey.
USD/JPY advanced to multi-week tops well north of the 150.00 hurdle following the firm performance of US and Japanese yields. Next on tap in Japan will be the weekly Foreign Bond Investment figures along with the preliminary Jibun Bank Manufacturing and Services Index on October 24.
AUD/USD deflated to six-week lows near 0.6650 on the back of usual concerns from China, the stronger Dollar and weaker commodity prices. The advanced Judo Bank Manufacturing and Services PMIs will be the next salient event in Oz on October 24.
Prices of WTI regained the smile and reversed six straight days of losses on Monday, this time reclaiming the area beyond the key $70.00 mark per barrel.
Prices of Gold rose to a record high around $2,740 mark per ounce troy in response to the stronger Greenback and rising US yields. Silver prices, on the flip side, rose past the $34.00 mark per ounce for the first time since November 2012, ending the day marginally on the upside.
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15.10.2024 16:27Fed's Daly: One or two more rate cuts this year if forecasts met
Federal Reserve (Fed) Bank of San Francisco President Mary Daly noted on Tuesday that although the Fed has made significant progress on tamping down inflation while also keeping the US labor market within long-run averages, there's still a lot of progress to be done. The Fed policymaker also leaned into the current rate cut spread, noting that it was likely the Fed will only see one or two more rate cuts in 2024.
Key highlights
If forecasts are met, I see one or two more rate cuts this year.
Talk of gradual rate cuts means less than it appears.
I am more comfortable that the Fed can wind down the balance sheet without market trouble.
Inflection points, like now, are likely to generate more dissents.
The lack of Fed dissents doesn't mean that officials fully agree.
See signs the housing market is coming back to life.
I won't be surprised by messy economic data.
3% rate may be around neutral.
The funds rate a long way from where it's likely to settle.
Inflation's retreat has been broad based.
The Fed has been able to get inflation down without major disruption.
I am cautiously optimistic about economic outlook.
A continued expansion remains very possible.
The labor market has cooled, largely normalized from the pandemic.
The economy is clearly in a better place, inflation has eased a lot.
The current unemployment rate is near the long-run level.
The data shows public expects inflation to ease more over time.
Fed monetary policy still restrictive and we are working to lower inflation.
Continued progress on the Fed goals is not assured, the Fed must remain vigilant.
The Fed must deliver 2% inflation while keeping the job market at full employment.
Risks to the Feds job & inflation mandates now more balanced.
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09.10.2024 23:07Fed's Daly: One or two more Fed rate cuts likely this year
Federal Reserve Bank of San Francisco President Mary Daly said on Wednesday that she "fully" supported the Fed's half of a percentage-point interest-rate cut last month. Daly further stated that one or two more rate cuts this year are likely if the economy evolves as she expects, per Reuters.
Key quotes
Fully supported half-point rate cut.
Quite confident we are on path to 2% inflation.
We are at full employment.
With policy rate steady, real rate was rising.
Rising real rate was a recipe for overtightening and injuring the labor market.
Rate cut was a recalibration, to rightsize rates for the economy.
Size of September rate cut does not say anything about pace or size of next cuts.
Two or one more cut this year is what is likely.
We will watch data, monitor labor market and inflation.
We will make more or fewer adjustments to rates as necessary.
I do not want to see further slowing in the labor market.
Most firms are seeing a hybrid work situation, not a return to a 5-day-in-the-office situation.
I am not worried about accelerating inflation.
I was more worried about injuring the labor market.
Will watch inflation data carefully.
Little evidence that balance sheet expansion has much of a direct effect on inflation.
We are coming near the inflation target but not satisfied, no victory declared.
Balance sheet is coming down to more normalised levels.Market reaction
The US Dollar Index (DXY) is trading 0.01% lower on the day at 102.90, as of writing.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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04.10.2024 11:45RON: Patience or a third rate cut in a row? – ING
The main event in the Central and Eastern Europe (CEE) region today is the meeting of the National Bank of Romania, ING’s FX strategist Frantisek Taborsky notes.
EUR/RON remains firmly anchored just below 5.00
“Our economists expect rates to remain unchanged at 6.50%, in line with expectations, but the survey is split. On one side is the rebounding credit market, wages and loose fiscal policy speaking against further rate cuts. On the other, inflation is lower than expected and the economy is surprising on the negative side.”
“The global picture is also mixed with the Fed cutting rates and the situation in the Middle East pushing up oil prices. FX forwards suggest a market on the dovish side for today's decision. However, it's hard to expect any reaction from the RON which remains firmly anchored just below 5.00 EUR/RON and we don't expect any changes here in the near term.”
“At least the front of the Romania government bond curve could see some support if the NBR continues to cut rates for the third straight time. On the other hand, in the bond space, the focus remains mainly on fiscal policy. Speculation yesterday of the Ministry of Finance's agreement with the European Commission on this year's deficit at 7.9% of GDP can hardly be taken as good news, given that it is more at the upper end of market expectations, implying further bond issuance this year.”
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26.09.2024 10:50USD/CAD Price Forecast: Trades at make or a break near 1.3450
- USD/CAD falls slightly ahead of the Fed Powell’s speech.
- Investors look for fresh interest rate cues for the November meeting.
- The Canadian economy is estimated to have barely grown in July.
The USD/CAD pair edges lower to near 1.3465 in Thursday’s European session after a strong recovery on Wednesday. The Loonie asset faces a mild sell-off as the US Dollar (USD) struggles to extend recovery, with the US Dollar Index (DXY) facing pressure near 101.00.
The next move in the US Dollar will be guided by Fed Chair Jerome Powell’s speech at 13:20 GMT in which he is expected to provide fresh guidance on interest rates. In last week’s press conference after the policy decision of interest rate reduction by 50 basis points (bps) to 4.75%-5.00%, the comments from Jerome Powell suggested that the larger-than-usual rate cut will not be the new normal.
On the contrary, the probability of the Fed delivering another 50 bps interest rate cut in November is 61%, higher than 39% a week ago, according to the CME FedWatch tool.
Meanwhile, the Canadian Dollar (CAD) will be influenced by the monthly Gross Domestic Product (GDP) data for July, which will be published on Friday. Economists estimate the Canadian economy to have grown by 0.1% after remaining flat in June.
USD/CAD prints a fresh swing low near 1.3400 on a daily timeframe, suggesting a firm bearish trend. The Loonie asset weakens after slipping below the August 28 low of 1.3440. A declining 20-day Exponential Moving Average (EMA) near 1.3545 indicates more downside.
The 14-day Relative Strength Index delivers a range shift move into the 20.00-60.00 territory from 40.00-80.00, which suggests that pullbacks would be considered as selling opportunities by investors.
Going forward, a further correction by the major below the immediate support of 1.3400 would expose it to January 31 low of 1.3360 and June 9 low of 1.3340.
In an alternate scenario, a recovery move above the psychological support of 1.3500 would drive the asset towards April 5 low of 1.3540, followed by September 20 high of 1.3590.
USD/CAD daily chart
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.
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18.09.2024 19:02Powell speech: Our decisions are never about politics or anything else
Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 50 basis points to the range of 4.75%-5% after the September meeting and responds to questions in the post-meeting press conference.
Key quotes
"Immigration is one of the things that has allowed unemployment rate to rise."
"Further declines in job openings will translate more directly into unemployment."
"My own sense is we are not going back to negative rates for long-term bonds; it feels neutral rate is higher than it was."
"It feels to me that neutral rate is probably significantly higher than it was pre-pandemic."
"Fed makes decisions based on its service to American people."
"Our decisions are never about politics or anything else."
"Our job is to support the economy on behalf of the American people."
"If we get it right, will benefit the American people."
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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18.09.2024 18:47Powell speech: We'll move as fast or as slow as we think appropriate
Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 50 basis points to the range of 4.75%-5% after the September meeting and responds to questions in the post-meeting press conference.
Key quotes
"It is time to calibrate our policy to something that is more appropriate given progress on inflation and on employment."
"The direction of our process is toward a sense of neutral."
"We'll move as fast or as slow as we think appropriate."
"We left open size of rate cut as we entered blackout."
"Broad support for a 50 bps cut today."
"There is a dissent and a range of views but also a lot of common ground."
"There's no sense that the Committee feels it is in a rush."
"We have made a good strong start today on cuts."
"I am very pleased that we did 50 bps."
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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17.09.2024 11:59USD: More or less? – Rabobank
While the Fed’s guidance and policy decision tomorrow will signal whether the selloff in the USD over the past few sessions is overdone, the US election will set the scene for the greenback into year-end and through the start of the new year, Rabobank’s Senior FX Strategist Jane Foley notes.
The 1.12 level to be tough resistance for EUR/USD
“The inflation impulse is expected to be greater under a Trump presidency given his preference for more tariffs and his desire to make permanent most of the tax cuts he enacted during his first term. Looser fiscal conditions suggests that the Fed easing cycle could come to an abrupt halt next year.”
“Rabobank expects that a Harris election victory would allow for a more extended series of Fed rate cuts which would imply a softer profile for the greenback then under a Trump presidency. That said, the outlook for the USD crosses also depends on the relative performance of other currencies. It is hoped that this week’s BoJ policy meeting will offer some sense of the timing of further BoJ rate hikes.”
“In view of the contrasting BoJ and Fed policy directions, we continue to favour selling USD/JPY on rallies. By contrast the direction of interest rate policy at the ECB is the same as the Fed. Since it could be argued that a sharp rise in the value of the EUR vs. the USD could allow the ECB to step up the pace of its easing, we expect EUR/USD 1.12 to be tough resistance.”
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05.09.2024 10:58ECB Watch: To cut or not to not cut – Nordea
The ECB is almost certain to cut rates by 25bp next week. While the central bank is set to refrain from any firm guidance on future steps, we think staff forecasts showing inflation at target in the medium-term support a quarterly pace of rate cuts, Nordea’s economists Jan von Gerich and Tuuli Koivu note.
ECB is set to deliver another 25bp rate cut
“The ECB is set to deliver another 25bp rate cut, and we expect the communication to be in line with our view of continued quarterly rate cuts. No clear signals about the timing of further policy steps should be expected.”
“The staff inflation forecast for the near-term will likely see small upward revisions, while the medium-term numbers are set to point to inflation stabilising around the two per cent target. Financial markets could see somewhat dovish moves on any soft-sounding comments from Lagarde.”
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04.09.2024 10:40PLN: Governor's dovish turn or just a wording adjustment? – ING
The only event on the CEE calendar today is the National Bank of Poland (NBP) meeting. In line with the market, we expect rates to be unchanged at 5.75% with little room for surprises. However, the statement following the decision may reveal some hints, but the main focus will be on the Governor's press conference tomorrow, ING’s FX strategist Frantisek Taborsky notes.
Governor Glapiński sounds exceptionally hawkish
“After July’s decision, Governor Glapiński sounded exceptionally hawkish, stating that rates might need to stay unchanged until 2026. Other policymakers suggested rate cuts should start earlier, while government measures to prevent high energy prices next year should mean the inflation path is more favourable than the NBP thought in June.”
“More recently, Glapinski realised that there is probably sufficient support in the Council to discuss rate cuts in 2025 and amended his wording accordingly, surprising markets with his less-hawkish policy stance. Our economists still expect the first cut in the second quarter of 2025 and think that rates could fall by 100bp next year, especially if the energy shield is not fully withdrawn.”
“The markets are more on the dovish side with the first fully priced-in rate cut in January, which on the other hand is still within the range of possible scenarios if inflation and economic recovery surprise to the downside. It's not that long ago though when the markets were pricing in earlier rate cuts, and if the governor hints at a dovish turn, the market would be happy to move in that direction. FX on the other hand lost ground yesterday, as did the entire CEE region, but is on the stronger side in the medium term and should remain there, in our view.”
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30.08.2024 10:59USD/JPY Price Forecast: Trading in a messy range until a break one way or another
- USD/JPY is stuck moving sideways on the 4-hour Chart used to analyze the short-term trend.
- It needs to break higher or lower to confirm directionality – otherwise it will continue oscillating.
USD/JPY has been trading in a messy range all through August with little clear direction.
The pair is likely in a “sideways” trend therefore, which will probably continue until a breakout in one direction or another confirms a directional trend.
USD/JPY 4-hour Chart
A break above 146.91 would provide a sign that bulls are getting the upper hand and probably lead to a move up to 147.85, then perhaps the August highs at around 149.39.
To the downside, a break below 143.45 (August 26 low) would confirm more downside, probably to around the 141.70s where the August lows are.
The Moving Average Convergence Divergence (MACD) is above its signal line and rising, supporting a very mildly bullish outlook, although it has not quite broken above zero yet, so it remains unconfirmed.
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29.08.2024 08:59USD: Consolidation or base-building? – ING
There is quite a popular view out there that with 100bp of Fed cuts priced by the end of this year and a terminal rate already priced at 3.00%, the dollar does not need to fall much further. Equally, however, we do not see the need for the dollar to rally too much either. And for the time being we are treating this week's dollar price action as bearish consolidation after the relatively sharp 5% fall since the start of July, ING’s FX strategist Chris Turner notes.
Dollar’s bearish holding pattern continues
“What gives us some comfort that this is a broad USD decline is the fact that the Asian FX laggards - including the Korean won - are all participating in the move. Even the Korean options market is showing the one-month risk reversal in favour of Korean won call options - something that rarely has been seen since 2007. Whether this represents investors rebalancing underweight Asian portfolios or Asian exporters catching up on some overdue dollar hedging remains to be seen.”
“As we have discussed recently, we will probably need to get some more downside surprises on US activity data to get the dollar bear trend moving again. That may not be the case where the calendar only shows revisions to second-quarter GDP data and the weekly initial claims. The latter seems resolutely stuck near the 235,000 area as broad job lay-offs are yet to emerge.”
“Yet these should rise at some point and Chair Powell's speech last Friday did sound a little nervous as to the speed with which the labour market was deteriorating. Expect DXY to stay relatively range-bound, and only a move above the 101.60/65 area would suggest we are seeing something more than bearish consolidation.”
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23.08.2024 09:42USD/CAD Technical Forecast: At make or a break below 1.3600 ahead of Fed Powell’s speech
- USD/CAD hovers near 1.3600, the potential breakdown region of the Broadening Triangle chart pattern.
- Investors keenly await Fed Powell’s speech at the JH Symposium.
- The Canadian Dollar will dance to the tunes of the monthly Retail Sales data for June.
The USD/CAD pair falls back below 1.3600 after a short-lived pullback move to near 1.3616 in Friday’s European session. The Loonie asset weakens as the US Dollar (USD) struggles to hold Thursday’s recovery move, driven by better-than-estimated preliminary United States (US) S&P Global PMI for August.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls to near 101.30. The Greenback is expected to remain on the sidelines, with investors focusing on the Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium.
In the JH event at 14:00 GMT, Jerome Powell is expected to provide fresh guidance on interest rates and the economic outlook. The Fed is widely anticipated to start reducing its key borrowing rates from the September meeting but traders are split over the likely size of interest rate cuts.
Meanwhile, the Canadian Dollar (CAD) will be influenced by the domestic monthly Retail Sales data for June, which will be published at 12:30 GMT. The Retail Sales data, a key measure of consumer spending that prompts inflationary pressures, is estimated to have declined consequently. The consumer spending measure is expected to have contracted by 0.3% after dropping 0.8% in May.
Lower sales at retail stores point to a decline in the purchasing power of households, which would prompt expectations of more Bank of Canada’s (BoC) interest rate cuts this year.
USD/CAD is on the verge of delivering a breakdown of the Broadening Triangle chart formation on a daily timeframe. The asset hovers near the horizontal support of the above-mentioned chart pattern below 1.3600.
The overall trend is bearish as it trades below the 200-day Exponential Moving Average (EMA), which trades around 1.3630.
The 14-day Relative Strength Index (RSI) oscillates in the bearish range of 20.00-40.00, suggesting a firm downside momentum.
More downside would appear if the asset breaks below April 9 low of 1.3540. This would drag the asset towards the psychological support of 1.3500, followed by March 21 low of 1.3456.
In an alternate scenario, a recovery move above August 12 high of 1.3750 would drive the asset toward the round-level resistance of 1.3800 and April 17 high near 1.3840.
USD/CAD daily chart
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.
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