Home Daily Commentaries CAD loses ground as future rate hikes favor the USD

CAD loses ground as future rate hikes favor the USD

Daily Currency Update

The CAD is weakening against the USD as higher interest rates are in sight for the US. The Federal Reserve’s hawkish stance of more hikes was seen as hugely supporting the US dollar. The base interest rates are expected to rise by 0.25% in Canada, compared to 0.50% in the US. As higher interest rates draw greater capital inflows, the USD is set to take on an advantageous position compared to the Loonie. The other undercurrent which may affect the CAD is the Organization of the Petroleum Exporting Countries (OPEC) conference, the triennial meeting is underway in Vienna which could be another deciding factor for the CAD’s performance. The benchmark 10-year Canadian government bond yields rose 3.8 basis points to 3.353%. The yield on similar US government benchmark debt rose to 3.8684% as per Reuters. In oil news, Western Texas Intermediate (WTI) crude oil prices have come under renewed selling pressure today and were last seen trading at the 71.90 level.

Key Movers

The US dollar had an average trading session against its major peers with the Euro pair being the only currency with a very choppy performance. US Federal Reserve Chairman Jerome Powell repeated several times that at least two rate hikes are in the cards for the US. Markets are now keenly watching the US Jobs report set to be released on Friday and the Federal Open Market Committee (FOMC) meeting minutes which are set to be published today. Consideration of the likelihood of rate cuts may result in a weaker US Dollar. Data released by the US Census Bureau (USCB) showed that new orders for manufactured goods and Factory Orders rose less than the market’s expectations. Increasing $1.6 billion (0.3%), to $578 billion in May. This print followed the previous increase of 0.3% and came in worse than the market expectation for a 0.8% increase. New orders for manufactured durable goods in May were up for the third consecutive month, increasing by $5 billion, or 1.8%, to $288.4 billion. This is also up from the previously published figure of a 1.7% increase.

The EUR/USD was see-sawing as the Purchasing Manager's Index (PMI) data was released for France and Italy. Both countries’ economies contracted alongside the EU Producer Price Index tumbling into deflationary territory. This key data is making the markets wonder about the latest hawkish comments from European Central Bank (ECB) president Christine Lagarde regarding rate hikes. According to this data, the ECB should not need to hike rates any further. However, at the same time, the Fed has made its stance clear about two more hikes, which will ultimately appreciate the USD substantially against the EUR. The EUR was last seen trading at 1.0875 levels, slowly heading towards the 1.09 range.

The sterling was seen recovering strongly as the inflation in the UK is expected to accelerate further and markets factor in more hawkish rate policy decisions from the Bank of England (BoE). Prime Minister Rishi Sunak has vowed to utilize the monetary and fiscal policy to tame the sticky and persistent inflation. The S&P Global Purchasing Managers Index (PMI) for the UK fell to 53.7 in June from May's 55.2. This aligned with preliminary market expectations. Following this release, Tim Moore, the Economics Director at S&P Global Market Intelligence commented via Reuters that, "The service sector showed renewed signs of fragility in June as rising interest rates and concerns about the UK economic outlook took their toll on customer demand.” Markets are betting that the BoE will raise the interest rates to 6.25% in the near future from the current 5%. The GBP was last seen trading at 1.2717 levels against the USD.

Expected Ranges

  • EUR/CAD: 1.4384 - 1.4476 ▼
  • GBP/CAD: 1.6807 - 1.6896 ▲
  • AUD/CAD: 0.8838 - 0.8860 ▼
  • USD/CAD: 1.3211 - 1.3292 ▼