Daily Updates

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.

On Friday, USD/CAD slipped in line with the broad weakness of the US Dollar, closing the week below 1.3280 after rallying to over 1.3385 earlier in the day. However, this morning, the US dollar is recovering most of its losses due to negative economic news from China, which once again highlights the potential for weaker global demand. A decline in global demand would undoubtedly have a negative impact on Canada’s export-dependent economy.

The Canadian dollar had strengthened sharply against the US Dollar in the month of June, going from over 1.36 to about 1.31 (USD/CAD). However, so far in July, the Canadian dollar has given up about half of those gains.

There seems to be no letup in the steady stream of positive economic news rolling in this week. Higher Japanese and Australian retail sales, better-than-expected US weekly unemployment numbers, and a significant upward revision in USD Q1 GDP from 1.4% to 2% are all fanning the flames of the ‘higher for longer’ school of thought when it comes to interest rates and central banks’ strategy to fight inflation.

The Canadian dollar continued its trend of setting overnight highs against the US dollar reaching 1.3177 last night. The Canadian dollar gained strength against the US dollar due to the broad weakness of the USD. Over the weekend and into Monday, the US dollar had initially strengthened as a result of the chaotic and short-lived armed rebellion in Russia, but it relinquished most of its gains today.

Last week, following ten consecutive increases, the Federal Reserve decided to pause its campaign of interest rate hikes. The Fed also went to great lengths to reaffirm their commitment to bringing inflation below the 2 percent target. The problem was that the markets didn’t buy it.