The USD/CAD pair rose to 1.3735 in the early Asian session on Tuesday. This increase was supported by a stronger US Dollar and higher US Treasury bond yields. However, the pair’s upside may be limited due to concerns about crude oil supply in the second half of the year, which could benefit the commodity-linked Canadian Dollar (CAD). The speech by Federal Reserve Chairman Jerome Powell will be closely watched on Tuesday.
Federal Reserve officials have taken a cautious stance, which is expected to support the US Dollar in the short term. The Fed has maintained its benchmark policy rate between 5.25% and 5.5% since last July and has stated that no rate cuts will be considered until they are confident that inflation is on a sustainable path to their 2% target.
Recent comments from San Francisco Fed President Mary Daly and Fed Governor Lisa Cook suggest varying views on inflation and its impact on monetary policy. In the US, the Manufacturing Purchasing Managers Index (PMI) for June declined to 48.5, indicating a contraction in the sector.
Despite stronger-than-expected inflation data in Canada in May, the Canadian Dollar has weakened. This has raised doubts about potential rate cuts from the Bank of Canada (BoC). BoC Governor Tiff Macklem has hinted at a gradual approach to interest rate cuts, with each decision depending on economic data.
The Canadian Dollar may find support from rising crude oil prices, driven by geopolitical tensions in the Middle East and expectations of increased summer fuel demand. Canada, as a major crude oil exporter to the United States, stands to benefit from higher oil prices.
Key factors influencing the Canadian Dollar include interest rates set by the BoC, the price of oil, the health of Canada’s economy, inflation, and trade balance. Market sentiment, particularly regarding risk appetite, also plays a role in the CAD’s performance. Additionally, the US economy, as Canada’s largest trading partner, has a significant impact on the Canadian Dollar.