- The USD/CAD weakens around 1,3720 in the first Asian session on Wednesday.
- The Canadian annual inflation rate increases to 1.9% in June, higher than expected.
- A softer US CPI report might seem to increase the probabilities of a Fed rate cut in September.
The USD/CAD pair quotes with slight losses about 1,3720 during the first Asian session on Wednesday. The highest inflation data in Canada reduced the expectations of interest rate cuts of the Bank of Canada (BOC), supporting the Canadian dollar (CAD). The US Production Price Index (IPP) will be the Center for Attention Later on Wednesday, followed by the Beige Book of the Fed and Industrial Production.
The data published by Canada statistics on Tuesday showed that the country’s consumer price index (CPI) increased by 1.9% year -on -year in June compared to the previous 1.7%. This figure was in line with the market consensus. Meanwhile, the underlying IPC of the BOC, one of the key inflation measures that closely follow the BOC, rose 2.7% year -on -year in June, compared to 2.5% in the previous reading. The Loonie attracts some buyers in an immediate reaction to the increase in inflation data.
“Today’s increase in underlying inflation, along with the upward surprise in the June Labor Report, means that it is very unlikely that Boc cut in July,” said analyst Carlos Capistran de Bofa Global Research. Investors see 5% probability that the Boc cut their reference interest rate from the current 2.75% rate at the next policy meeting on July 30, compared to a 14% possibility before the Canadian CPI report.
The U.S. underlying inflation increased less than estimated for fifth month in June, which raises questions about how widely the tariffs of US President Donald Trump will affect the tariffs Donald Trump at consumer prices. The markets expect the US Federal Reserve (FED) to maintain its position at the July meeting and then reduce in a percentage point in September. The operators will take more clues of the US IPP inflation report. Later on Wednesday to obtain a new impulse.
Canadian dollar – frequent questions
The key factors that determine the contribution of the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BOC), the price of oil, the main export product of Canada, the health of its economy, inflation and commercial balance, which is the difference between the value of Canadian exports and that of its imports. Other factors are market confidence, that is, if investors bet on riskier assets (Risk-on) or seek safe assets (Risk-Off), being the positive risk-on CAD. As its largest commercial partner, the health of the US economy is also a key factor that influences the Canadian dollar.
The Canada Bank (BOC) exerts a significant influence on the Canadian dollar by setting the level of interest rates that banks can provide with each other. This influences the level of interest rates for everyone. The main objective of the BOC is to maintain inflation between 1% and 3% by adjusting interest rates to the loss. Relatively high interest rates are usually positive for CAD. The Bank of Canada can also use quantitative relaxation and hardening to influence credit conditions, being the first refusal for CAD and the second positive for CAD.
The price of oil is a key factor that influences the value of the Canadian dollar. Oil is the largest export in Canada, 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, since the aggregate demand of the currency increases. The opposite occurs if the price of oil drops. The highest prices of oil also tend to give rise to a greater probability of a positive commercial balance, which also supports the CAD.
Although traditionally it has always been considered that inflation is a negative factor for a currency, since it reduces the value of money, the opposite has actually happened in modern times, with the relaxation of cross -border capital controls. Higher inflation usually leads to central banks to raise interest rates, which attracts more capital of world investors who are looking for a lucrative place to save their money. This increases the demand for the local currency, which in the case of Canada is the Canadian dollar.
The published macroeconomic data measure 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 CAD direction. A strong economy is good for the Canadian dollar. Not only attracts 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.
