- USD/CAD moves lower as commodity-linked CAD finds support on higher oil prices.
- WTI price is appreciating as US inflation data has increased speculation of a Fed rate cut in September.
- Chicago Fed President Austan Goolsbee said the U.S. economy appears to be on track to achieve 2% inflation.
The USD/CAD is retracing its gains from the previous session, trading around 1.3620 during European hours on Friday. The commodity-linked Canadian Dollar (CAD) is finding support from higher crude oil prices, given that Canada is the largest exporter of oil to the United States (US).
West Texas Intermediate (WTI) oil price extends its winning streak for the third session, trading around $82.20 per barrel at the time of writing. Crude oil prices received support as lower-than-expected US Consumer Price Index (CPI) data for June has raised speculation of a possible Federal Reserve (Fed) rate cut in September. Lower borrowing costs support the US economy, the world’s largest oil consumer, which in turn boosts demand for crude oil.
In June, the US Consumer Price Index (CPI) declined 0.1% month-on-month, hitting its lowest level in more than three years. The core CPI, which excludes food and energy price volatility, rose 3.3% year-on-year, compared with a 3.4% increase in May, in line with expectations. Meanwhile, the core CPI rose 0.1% month-on-month, below the expected and previous increase of 0.2%.
On the policy front, Federal Reserve Bank of Chicago President Austan Goolsbee said Thursday that the U.S. economy appears to be on track to achieve 2% inflation. This suggests that Goolsbee is gaining confidence that the time to cut interest rates may be drawing near. He also stated “My view is that this is the path to 2%,” according to Reuters.
In Canada, the unemployment rate rose to 6.4% in June, the highest since January 2022, with the economy losing 1,400 jobs. This has increased the likelihood that the Bank of Canada (BoC) will implement further interest rate cuts to boost economic growth. Consequently, the yield on the 10-year Canadian government bond fell to around 3.4%, reflecting dovish expectations from the BoC.
Traders are looking ahead to the Michigan Consumer Sentiment Index and the US Producer Price Index (PPI) data, due on Friday, for further impetus on the US economy. On the CAD front, May Building Permits (MoM) will be watched.
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.
