After gaining ground on the back of the unfolding Turkish financial crisis the US Dollar to Canadian Dollar (USD/CAD) exchange rate faltered on Tuesday morning.
As market jitters eased this reduced the appeal of the US Dollar, which enjoyed a bullish run in response to the recent slump of the Turkish Lira.
While trade relations between the US and Canada showed fresh signs of deterioration, with the Trump administration continuing to threaten the imposition of tariffs, this failed to offer the USD/CAD exchange rate much in the way of support.
Although worries remain over the future of the Turkish economy, given the continued defiant tone of commentary from President Recep Tayyip Erodgan, an easing in investor anxiety still offered support to the risk-sensitive Canadian Dollar.
Fed Rate Hike Expectations Continue to Support US Dollar Canadian Dollar Exchange Rate
July’s US consumer inflation expectations reading did little to improve the appeal of the US Dollar on Monday afternoon, with the measure holding steady on the month.
With forecasts pointing towards a fresh dip in the latest NFIB small business optimism index the US Dollar could weaken further this afternoon.
Signs of softening domestic confidence could raise fresh concerns over the ultimate impact of the Trump administration’s belligerent approach to international trade, with the impact of trade tariffs starting to filter through into the wider economy.
However, a solid showing from July’s import and export price index results may offer the USD/CAD exchange rate a fresh rallying point.
Markets continue to expect the Federal Reserve to deliver further monetary policy tightening before the end of the year, limiting the vulnerability of USD exchange rates
As analysts at Nomura commented:
‘Chicago Fed President Evans, a dove in recent years, indicated on Thursday that he believes a somewhat restrictive monetary policy stance will eventually be warranted given strong economic momentum and fiscal stimulus. His comments, somewhat similar to his more hawkish shift in July, could indicate that while the Committee continues to see trade policy as adding uncertainty to the outlook, economic fundamentals remain firm enough to support further gradual rate increases. Evans also indicated that declines in inflation expectations, long a concern of more dovish participants including Governor Brainard, could pick up as the economy remains strong.
‘Taken altogether, the hawkish shift from Evans – and Governor Brainard’s more hawkish turn earlier this year – indicate that St. Louis Fed President Bullard and Minneapolis Fed President Kashkari may represent the only participants who remain reluctant about additional rate increases in 2018. We continue to expect two additional rate increases this year, in September and December, with two more in 2019 before the FOMC takes an extended pause.’
Unless domestic data deteriorates significantly bets on the prospect of additional Fed interest rate hikes are likely to keep the USD/CAD exchange rate from suffering any significant losses.
Solid Canadian Inflation Forecast to Support CAD Exchange Rates
Confidence in the Canadian Dollar could pick up further ahead of Friday’s consumer price index data.
Any signs of mounting inflationary pressure within the Canadian economy would give investors fresh incentive to favour the Canadian Dollar over its rivals.
As long as inflation continues to run comfortably within the Bank of Canada’s (BOC) target range CAD exchange rates are likely to benefit.
Any uptick, meanwhile, could encourage bets that the BOC will tighten monetary policy further in the coming months.
On the other hand, a disappointing showing from July’s CPI data may put the Canadian Dollar under renewed pressure.
Persistent market jitters and any fresh escalation in tensions between US and Canada could also weigh on CAD exchange rates over the course of the week.
Until the appeal of risk-sensitive assets materially improves the USD/CAD exchange rate is likely to see limited downside pressure.
Developments in the oil market are likely to drive further CAD volatility, particularly if the latest US stockpile figures point towards an increase in the global supply.
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TAGS: Canadian Dollar Forecasts