- USD/CAD is trading in positive territory for the eighth consecutive day near 1.3745 in the early Friday Asian session.
- US CPI inflation was higher than expected in September; Unemployment claims hit annual high
- Canada’s unemployment rate is estimated to rise from 6.6% in August to 6.7% in September.
The USD/CAD pair extends the rally to around 1.3745 during the early Friday Asian session. Higher-than-expected US inflation data and hawkish comments from Federal Reserve (Fed) officials provide some support to the Dollar ahead of the September US Producer Price Index (PPI). US and Canadian employment data.
US inflation was higher than expected in September, while jobless claims rose unexpectedly. Data released by the US Bureau of Labor Statistics on Thursday showed that the Consumer Price Index (CPI) rose 2.4% year-on-year in September, compared to 2.5% in August. The figure exceeded the consensus of 2.3%. The core CPI, excluding food and energy, rose 3.3% year-on-year in September, above the forecast and the previous reading of 3.2%.
Meanwhile, US initial jobless claims for the week ending October 4 rose to 258,000, up from 225,000 the previous week. The figure was above the initial consensus of 230,000.
Although the inflation reading was higher than expected, traders in futures markets increased their bets that the Fed would cut rates by 25 basis points (bps) at the November meeting, valuing it at almost 86%, according to the CME FedWatch tool.
On the CAD front, the Canada employment report is due out later on Friday. The unemployment rate is projected to increase from 6.6% in August to 6.7% in September. Rising unemployment rate and moderating inflation towards the target range could trigger a faster and larger rate cut by the Bank of Canada (BoC). This, in turn, puts some selling pressure on the Canadian Dollar (CAD) and acts as a tailwind for the USD/CAD pair.
The Canadian Dollar FAQs
The key factors that determine the price of 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 product, 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 are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the 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 usually 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 also rises, 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 happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.
The published macroeconomic data measures the health of the economy and may 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 may encourage the Bank of Canada to raise interest rates, resulting in a stronger currency. However, if 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.