Daily Updates

With the U.S. Federal Reserve kicking off its latest rate-cutting cycle with an aggressive half-point cut, the ripple effects are likely to be felt across global markets. For the Canadian dollar, the impact could be substantial, as shifts in interest rates and economic sentiment may weigh heavily on the currency’s future performance.

So, there you have it—it’s official! After more than four years, the U.S. Federal Reserve has kicked off its rate-cutting cycle with an ‘outsized’ half-point or 50 basis point cut. That was the easy part. The challenges ahead are significant, as the Fed now seeks to prevent its previous rate hikes from pushing the economy, particularly the labor market, into negative territory. If it moves too quickly, it risks eroding the hard-won gains it has made against inflation. However, if it moves too slowly, it risks tipping the labor market into the red. The Fed is stuck between the proverbial rock and a hard place.

The Canadian dollar gained about 0.25 of a cent against the U.S. dollar on Wednesday morning, breaking through the 1.36 threshold after hitting its lowest level against the USD since August on Tuesday. Recently, the focus has been on the path the Federal Reserve (Fed) will take regarding interest rate reductions. Until last week, there was rampant speculation that the Fed might adopt a much more aggressive approach. However, Wednesday morning’s U.S. inflation data was mixed: while annual inflation dropped to 2.5% (down from 2.9%), core monthly inflation, which excludes food and energy costs, rose 0.3% in July.

The Canadian dollar has remained relatively stable this week, with only slight softening as markets search for direction. Bank of Canada (BoC) Governor Tiff Macklem spoke in London on Tuesday but refrained from providing any clear insights on the BoC’s interest rate trajectory or the possibility of a 50-basis-point rate cut. This left market participants looking to other events, such as the upcoming U.S. presidential debates, which could influence market sentiment.

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 time has come for policy to adjust.” With these eight words spoken on Friday at the Jackson Hole symposium, Fed Chair Powell signaled the end of the Fed’s historic inflation-fighting campaign. The market quickly reacted, with the Dow Jones Industrial Average adding more than 300 points (about 0.8%), and the Nasdaq Composite gaining 1.1%. Treasury yields slipped, and the US Dollar Index weakened to its lowest level since the beginning of the Fed’s rate-hiking cycle.

When it rains, it pours, and that is certainly the case for the Canadian economy and the Canadian dollar this week. Bad news is piling on, pushing the USD/CAD above 1.38 for the first time in 14 weeks.

On Wednesday, for the second time in a row, the Bank of Canada cut interest rates. In a clear shift to a more dovish (less aggressive) stance, the bank stated that it is now equally concerned about the negative impact of higher interest rates on the Canadian economy as it is about fighting inflation. This is a clear signal from the bank that more cuts are coming. In fact, the bank all but said so with Governor Macklem stating, “The expected direction of our policy rate is lower, but we’re not on a predetermined path.”

The USD/CAD pair jumped to the 1.3750 range on Friday after the release of weaker-than-expected Canadian Retail Sales numbers, a barometer of the state of the Canadian consumer. This contrasts with the better-than-expected retail sales report from the US Commerce Department on Tuesday, once again stoking fears about the potential of widening interest rate differentials between Canada and the US.

The Canadian dollar slipped to a two-week low against the US dollar on Tuesday as investors reacted to diverging economic data from Canada and the US. On the Canadian side, Statistics Canada released the latest annual inflation rate, which came in at 2.7 percent compared to the expected 2.8 percent. South of the border, US data showed stronger-than-expected retail sales numbers, suggesting that the US consumer is adjusting well to the high-interest-rate environment.