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USD/CAD remains on the defensive near 1.3600 ahead of US CPI

  • USD/CAD is trading lower around 1.3615 in early Asian trading on Thursday.
  • Fed’s Powell said the central bank will cut rates when it’s ready, regardless of the political calendar.
  • A rise in Canada’s unemployment rate has prompted the BoC to consider cutting interest rates in July, an ING analyst said.

The USD/CAD pair remains under selling pressure near 1.3615 during the early hours of the Asian session on Thursday. Meanwhile, the US Dollar Index (DXY) extends its consolidation above the 105.00 hurdle as traders await the key US inflation report. The US Consumer Price Index (CPI) data for June is due out on Thursday, along with weekly initial jobless claims and speeches from Federal Reserve (Fed) Raphael Bostic.

Fed Chairman Jerome Powell answered questions before the House Financial Services Committee on Wednesday. Powell said the central bank will make interest rate decisions based on data, incoming data, the evolving outlook and the balance of risks, and not on political factors.

He also said the Fed will not wait for U.S. inflation to slow to its 2% target before cutting interest rates. The probability that the Fed will keep the policy rate unchanged in September stood at nearly 25% after this event, according to CME’s FedWatch tool.

On the CAD front, falling crude oil prices could undermine the commodity-linked Canadian Dollar (CAD) as Canada is the largest exporter of crude oil to the United States.

Additionally, Francesco Pesole, FX analyst at ING, said that a rise in Canada’s unemployment rate has put a rate cut by the Bank of Canada (BoC) in July on the table. Financial markets have priced in 16 basis points (bps) of easing for July.

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

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