After gaining 4 cents in less than a month against the US Dollar, the Canadian dollar is now trading at its highest level since March of this year, and the Loonie might have more room to spread its wings. Over the last month and a half, what began as a trickle of softer-than-expected US economic reports has turned into a flood, significantly souring the outlook for the US economy. Fed Chair Powell acknowledged this during his speech in Jackson Hole, Wyoming, on Friday, stating that the Fed does “not seek or welcome further cooling in labor market conditions.” His comments sparked an eruption of joy in the markets, but most importantly for currency markets, they resulted in the US Dollar Index seeing its largest daily decline in nine months.
The US Dollar Index (DXY) serves as a broad indicator of the dollar’s strength or weakness against other key currencies. When the index drops, it usually indicates that the dollar is weakening compared to these currencies, as we saw following Powell’s comments.
Currently, there is a debate among market analysts as to whether the Fed’s first rate cut in September will be 25 basis points or 50 basis points. Given the Fed’s particular focus on labor market conditions, markets are paying close attention to next Friday’s US jobs data. If the jobs data comes in weaker, the chances of a 50-basis point cut increase, and the US dollar will likely continue to experience broad weakening. Lower interest rates help stimulate economic activity, and a low-interest environment is seen as beneficial for the Canadian dollar. Additionally, if Canada and the US are cutting interest rates simultaneously, the US dollar does not benefit from increased capital flows.
The Canadian dollar is currently trading at 1.3470 CAD against the US Dollar.
