Jul 23, 2024
Explore why the Bank of Canada's recent rate cuts and a surge in unemployment are pushing USD/CAD near 1.3800 while rate differentials with the US may widen further.
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Director of Strategy, Chicago
USD/CAD trading near 1.3800 amid weak CAD data
The USD/CAD pair is nearing 1.3800, driven by recent weakness in the Canadian dollar following the Bank of Canada's early moves to cut interest rates amidst softening employment and inflation data. Canada’s proactive rate cuts are aimed at stimulating economic activity but pose challenges for the CAD against a strong USD.
Canadian unemployment hits 6.4%
Canada's unemployment rate surged unexpectedly to 6.4% in June, the highest since January 2022. This uptick has contributed to the Bank of Canada's decision to lower interest rates, reflecting concerns over slowing economic momentum and its impact on the labor market.
Bank of Canada cuts interest rates 25bps
In response to faltering economic indicators, the Bank of Canada cut its key interest rate by 25 basis points in June and signals further reductions at the upcoming July meeting. These measures are in response to unemployment rises and underwhelming inflation rates, contrasting with the sturdier economic conditions in the US.
Falling interest rates driving weaker CAD demand
The decrease in Canadian interest rates, potentially widening the interest rate differential with the US to a full 1.00% by July, is diminishing demand for the Canadian dollar. This disparity could lead to significant shifts in investment flows between the two currencies.
Will Canadian dollar depreciate?
As the USD/CAD approaches a critical point near 1.4000, not breached since the pandemic's onset, the continuing economic divergence between Canada and the US may push the CAD to depreciate further, especially if Canadian rate cuts persist.
How hard will US rates fall?
While US unemployment trends upward, mirroring some of Canada's economic challenges, the Federal Reserve is anticipated to enact a 25bps rate cut in September. However, the pace and scale of Canada's rate cuts could influence the trajectory of the USD/CAD pair, particularly if Canadian rates fall more swiftly than US rates.
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