USD/CAD surges to near 1.3800 as US yields rise ahead of Fed Beige Book

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USD/CAD extends its gains for the third successive session, trading around 1.3800 during the European hours on Wednesday. The US JOLTS Job Openings and the US Federal Reserve (Fed) Beige Book will be eyed later in the North American session.

USD/CAD rises ahead of US JOLTS Job Openings and the Fed Beige Book due on Wednesday.
The US Dollar gains demand as higher US yields attracts foreign capital.
The Canadian Dollar comes under pressure on expectations of a potential Bank of Canada rate cut in September.

The USD/CAD pair appreciates as the US Dollar (USD) receives support amid rising yields on US Treasury bonds, with the 2-year at 3.66% and the 10-year at 4.29% standing at the time of writing. It is worth noting that rising Treasury yields make US assets more attractive to global investors, hence capital inflows increase demand for USD.

However, the upside of the Greenback could be restrained due to the prospect of the US Federal Reserve (Fed) rate cut this month, along with the dovish remarks from Fed officials. The CME FedWatch tool indicates pricing in more than 89% of a 25-basis-point (bps) rate cut by the Fed at the September policy meeting, up from an 86% chance a day ago.

Traders are also awaiting labor market data this week that could shape the US Federal Reserve’s (Fed) policy decision in September. Key reports include ADP Employment Change, Average Hourly Earnings, and Nonfarm Payrolls for August.

The USD/CAD pair also draws support as the Canadian Dollar (CAD) faces challenges amid prospects of a Bank of Canada (BoC) interest rate cut in September. Traders are now pricing in nearly a 55% chance that the Canadian central bank will cut rates in its next decision, up from around a 40% chance last week, according to Reuters.

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.