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.
On Tuesday, the Canadian dollar initially weakened against the US dollar after Statistics Canada data showed Canada’s annual inflation rate dipped to 2.8 percent in June. This marked the lowest inflation rate in over two years, harking back to the times of masks and lockdowns. The lower-than-anticipated inflation number provides some breathing room for the Bank of Canada and increases the likelihood of maintaining interest rates at its next meeting in September. Lower interest rates can reduce the appeal of a currency like the CAD to foreign investors.
On Wednesday, the Bank of Canada (BoC) increased its benchmark rate to 5 percent, bringing the policy rate to a level not seen since April 2001. As we had previously mentioned and as astutely pointed out by BMO analysts, the Canadian dollar received an additional boost from today’s Bank of Canada interest rate announcement, as markets had not fully priced in a rate hike. The Canadian dollar is currently trading at 1.3186 against the US Dollar.
Here are some notable takeaways from the bank’s announcement today:
The stage is set for the Canadian dollar to potentially see some noticeable gains against the US dollar this week.
First and foremost is the Bank of Canada’s policy announcement scheduled for Wednesday. As discussed previously, there is a good case to be made for both a rate hike and a pause. Analysts are leaning slightly towards a 25 basis points (bps) increase. Given that it’s such a close call, if a hike does happen, the Canadian dollar could experience a larger than usual bounce since it’s not fully priced in by the markets.