- USD/CAD extends recovery to 1.3715 in Thursday’s Asian session.
- US CPI inflation fell to 2.9% year-on-year in July from 3% in June, softer than expected.
- Falling crude oil prices weigh on the commodity-linked Canadian dollar.
The USD/CAD pair is trading on a stronger note near 1.3715 on Thursday during Asian trading hours. Falling crude oil prices drag the commodity-linked Canadian Dollar (CAD) lower and lift the USD/CAD. Amid lack of top-tier economic data from Canada, the pair remains at the mercy of the USD price dynamics. US Retail Sales will be the highlight on Thursday.
The US Consumer Price Index (CPI) inflation report indicated that price pressures are on track to return to the Federal Reserve’s (Fed) 2% target. However, speculation of a deeper rate cut by the Fed has subsided. According to the CME FedWatch tool, traders have priced in a nearly 41% chance of a 50 basis point (bps) rate cut by the Fed in September, up from 50% before the US CPI data. This, in turn, provides modest support to the Dollar.
Data released by the Labor Department on Wednesday revealed that the US headline CPI inflation softened to 2.9% year-on-year in July from 3% in June. This figure was below the market consensus. The core CPI, excluding food and energy, rose 3.2% year-on-year after a 3.3% increase seen in July, in line with the market forecast.
As for the CAD, many economists see the Bank of Canada (BoC) cutting interest rates further at each of its three remaining policy meetings in 2024, starting with the September meeting. This could weigh on the Loonie in the short term. Moreover, falling crude oil prices will likely undermine the CAD for the time being, as Canada is the leading exporter of oil to the US.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian dollar.
The Bank of Canada (BoC) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment, but it can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
