Growing concerns about interest rates remaining high for extended periods are dampening positive global economic sentiment. This is aiding the US dollar in outperforming most other major currencies, with the exception of the NZD and the Canadian dollar.
A flurry of positive economic developments globally has helped change global market sentiment, leading to a more optimistic outlook and lifting equity markets so far this week. On Monday, data from China showed lending has stabilized and perhaps even rebounded, which is a positive sign as Chinese authorities continue to take steps to turn the world’s second-largest economy around. Additionally, there is growing evidence to suggest that the Fed is beginning to take a more dovish (less aggressive) stance towards future rate hikes south of the border. This theory was further supported by Treasury Secretary Yellen’s comments this past weekend, expressing confidence that inflation can be contained without pushing the US economy into recession. All of this has resulted in broad weakness in the US dollar and a rally for risk-based assets such as the Canadian dollar.
After a post-pandemic economic boom and a persistently strong economy, it appears that the party is over, at least in Canada. A historic round of interest rate hikes is finally taking its toll, cooling demand while allowing supply to catch up. On Friday, Statistics Canada announced that Canada’s economy unexpectedly contracted in the second quarter at an annualized rate of 0.2%.
The Canadian dollar briefly sank to a two-and-a-half-month low against the US Dollar on Tuesday, and the USD/CAD currency pair finally pushed past 1.35 (CAD/USD 0.7407) after multiple failed attempts to do so over the past 10 days.
The Canadian dollar has gained about half a penny against the US dollar this morning after the release of inflation data that showed Canadian headline inflation accelerated to 3.3% in July, up from 2.8% in June.
It has been a challenging few days for the Canadian dollar, both domestically and internationally. It began last Friday when Statistics Canada reported a loss of 6,400 jobs, completely missing economists’ prediction of a 25,000 job gain. On the global front, China’s economic prowess, which has fueled the global economy, is now showing signs of stumbling. Recent trade data from China released on Tuesday revealed significant declines in imports and exports. Wednesday brought more negative news, with clear signs that China has entered a perilous deflationary phase, marked by declining prices and reduced economic activity, which could lead to even further declines. Predictably, these adverse developments weakened the Canadian dollar, as investors sought refuge in the relative safety of the US dollar, abandoning riskier assets like the Canadian dollar. The Canadian dollar fell to a low of 1.3501 on Tuesday.
The Canadian Dollar continued its decline against the US Dollar on Tuesday morning. The latest drop followed the release of trade data from China, the world’s second-largest economy, revealing that July exports hit the lowest level since February 2020. The trade data was the most recent in a series of weaker economic data points indicating that the Chinese economy is faltering.
The Canadian dollar fell just shy of hitting a month-low on Wednesday after the credit rating agency Fitch downgraded the US government’s credit rating from its highest AAA rating to the second highest AA+. The announcement resulted in a noticeable cascade throughout the financial system. Everything from equities to cryptocurrencies, and perhaps most significantly for the Canadian dollar, oil prices, lost value. Investors quickly moved to dump risky assets such as the Canadian dollar for safe-haven assets like the US dollar. Although it may seem counterintuitive for investors to invest in US dollars just as the US government’s creditworthiness has come into question, financial uncertainty and stress will always, at least initially, result in greater demand for the US dollar.
With markets pricing in an almost 100% chance of a quarter-percentage point rate hike by the FED (98.8% to be exact), let’s delve into what the FED would have to do or say to significantly impact the Canadian dollar to US dollar exchange rate.
The Canadian dollar saw modest gains versus the US dollar Monday, with the USD/CAD climbing about 0.3 percent. These gains were due to higher oil prices and a more positive economic outlook following a BoC market survey. According to the second-quarter survey released by the Bank of Canada (BoC), market participants expect the Canadian gross domestic product to grow by 0.7%, as opposed to the 0.1% contraction expected in the BoC’s previous survey.
