CAD drifting higher ahead of Jackson Hole
According to Statistics Canada, international securities transactions in June resulted in a net outflow of $8.3 billion from the Canadian economy. This was due to a significant difference between foreign investment in Canada and Canadian investment abroad. Foreign investors added $709 million in Canadian securities, marking the first investment since January, with acquisitions in bonds ($6.9 billion) and a notable divestment in Canadian equities ($3.0 billion). Conversely, Canadian investors acquired $9.0 billion of foreign securities, primarily targeting US shares ($8.2 billion) and non-US bonds ($4.5 billion), which contributed to a strong investment in foreign equitie
The recent upward trajectory of the CAD has been notable, particularly as it appears somewhat disconnected from the U.S. dollar’s recent stability. Following the release of the July FOMC minutes, the U.S. dollar has slightly moved upwards. Because the FOMC meeting was held before the updated jobs data was released, the minutes’ references to a “solid” job market looks outdated. Market focus has shifted to Fed Chair Jerome Powell’s upcoming speech to gauge how the Federal Reserve has registered the substantial downward revisions to prior jobs data.
This week’s movement in the CAD may be influenced by domestic market flows. The current level of 1.389 represents a significant resistance point, marking the highest level observed this month and since late May. The persistent nature of inflation is a key concern, with some market participants anticipating a hawkish shift in the Bank of Canada’s forward policy guidance; however, analysts remain divided on this outlook, as reflected by the modest 35% probability for an interest rate cut. The upcoming risk event this Friday, which includes comments from Federal Reserve Chair Powell, could be a catalyst for a decisive move above this resistance level. While the overall macro environment has not deteriorated further since May, there appears to be underlying upward pressure on the pair.
Fed under fire again
Renewed political pressure on the Federal Reserve (Fed) is unsettling markets and risks weighing on the US dollar. President Trump’s call for Governor Lisa Cook to resign, citing allegations tied to past mortgages, has revived concerns over Fed independence and added to investor caution.
The move comes amid broader efforts by the administration to reshape the Fed’s policy stance. If Cook were to step down, the voting balance on the Board could tilt more dovishly. Governors Waller and Bowman have already dissented in favour of rate cuts, and Stephen Miran – recently named as a temporary replacement for Adriana Kugler – is expected to support more aggressive easing if confirmed by September.
The potential exit of Cook would amplify dovish voices within the FOMC and deepen internal divisions, increasing uncertainty around the Fed’s policy path. This dynamic is contributing to a steeper yield curve and could reintroduce downside risks for the dollar, especially if market confidence in the Fed’s independence continues to erode.
The US dollar has staged a modest rebound this week though, recovering slightly against a basket of major peers. However, trading has been relatively subdued due to a lack of fresh economic data – until today. August flash PMIs will offer a timely health check on the US economy, potentially shaping near-term dollar direction.
Meanwhile, investor focus is shifting toward Friday’s Jackson Hole symposium, where Fed Chair Jerome Powell is set to speak. His remarks will be closely scrutinized for clarity on the Fed’s policy stance amid renewed political pressure and internal divisions. With markets already jittery over recent attacks on Fed independence, Powell’s tone could prove pivotal for the dollar’s trajectory heading into September.
Losing Interest: sterling’s real rate reality
UK real interest rates have declined sharply over the past year, dropping from a peak of 3.3% in September 2024 to just 0.2% today. With CPI inflation running at 3.8% and the Bank of England’s (BoE) policy rate at 4.0%, inflation-adjusted returns have eroded significantly. This deterioration points to a loosening in financial conditions, despite the nominal rate remaining relatively high.
Real rates are a crucial barometer of monetary policy stance. Their decline suggests that current policy settings may no longer be sufficiently restrictive to curb nominal demand growth. Whether inflation can sustainably return to target without tighter conditions is increasingly uncertain, particularly with 12-month inflation expectations still hovering around 4%.
For sterling, the implication could be broadly negative. Lower real yields reduce the relative attractiveness of UK assets, especially when compared to economies like the US, where real rates remain firmly positive. This dynamic risks triggering capital outflows and weighing on GBP, particularly against higher real-yielding peers.
Given the BoE’s own forecast that inflation has yet to peak, the decision to cut rates earlier this month came as a surprise to some. With inflation expected to top out at 4%, another rate cut in November would push the real policy rate into negative territory. However, market pricing suggests growing scepticism around further easing, with the probability of another cut before year-end now below 50%.
Combined with persistent inflation and weak growth prospects, the UK faces rising stagflation risks – a toxic mix that could constrain the BoE’s policy flexibility and deepen the pound’s vulnerability. In this environment, GBP/USD may struggle to sustain rallies, while GBP/EUR could remain range bound.
The FX options market may begin to reflect this shift in sentiment, with risk reversals potentially skewing more negatively for GBP as investors seek protection against further depreciation.
CAD remains under pressure against G10 pairs
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: August 18-22
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.ve a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
