USDCAD Fundamental Analysis – 2-August-2024

In August, the Canadian dollar weakened past $1.385 (USD/CAD), reaching its lowest point in eight months. The strengthening US dollar primarily influenced this decline, as investors scrutinized the latest economic data from both countries.

A weaker Canadian dollar indicates reduced purchasing power for Canadian consumers and higher costs for imported goods.

Decline in the Manufacturing Sector

The Canadian Manufacturing Purchasing Managers’ Index (PMI) fell to 47.8 in July 2024 from 49.3 in June. This decline signifies the most significant contraction in operating conditions since December, marking the 15th consecutive month of downturn.

A PMI below 50 indicates contraction, reflecting reduced output and new orders due to challenging market conditions, inflation, and geopolitical uncertainties. These factors have pressured the Bank of Canada to adopt a more cautious approach, offering limited support to the Canadian dollar.

GDP Growth Amidst Challenges

Despite the manufacturing sector’s struggles, preliminary GDP figures showed a modest growth of 0.1% in June, following a 0.2% increase in May. This growth suggests that while specific sectors are underperforming, the economy is still slowly expanding. It indicates resilience in other areas, such as services, which might contribute to GDP growth.

US Federal Reserve’s Influence

In contrast, the US Federal Reserve maintained its interest rate, acknowledging the risks of an overly aggressive monetary policy amidst a moderating labor market. This decision highlights the Fed’s cautious stance, balancing inflation control with economic stability. A steady interest rate in the US strengthens the US dollar, making it more attractive to investors than the Canadian dollar.

USDCAD Fundamental Analysis – 2-August-2024

The Canadian dollar may continue to face pressure if domestic economic data remains weak and the Bank of Canada maintains its dovish stance. Investors should monitor upcoming economic indicators, including PMI reports and GDP figures, to gauge the Canadian economy’s health.

Additionally, the interplay between US and Canadian monetary policies will significantly influence currency movements. As such, staying informed on central bank decisions and geopolitical developments is crucial for making informed investment decisions.

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