- USD/CAD weakens to around 1.3470 early in the Asian session on Friday.
- US August PCE data will be in the spotlight on Friday.
- The weaker US dollar weighs on the pair, but lower crude oil prices could limit its decline.
The USD/CAD pair retreats to near 1.3470 during the early stages of the Asian session on Friday, pressured by broad-based weakness in the US Dollar (USD). Investors are hoping for further clues about the health of the economy following Thursday’s positive US economic data. The US personal consumption expenditure (PCE) price index for August will be the focus on Friday.
With its larger-than-normal reduction last week, the Federal Reserve (Fed) sent a clear message that interest rates will be headed significantly lower in the future. This, in turn, puts some selling pressure on the Dollar against the Canadian Dollar (CAD).
Fed officials forecast another 50 basis point (bps) rate cuts by the end of the year and another 100 bps of reductions by the end of 2025. However, the release of the data from the PCE US inflation, the Fed’s preferred pricing metric, could give them clues about the US central bank’s path forward. Headline PCE is expected to show a 2.3% YoY increase in August, while core PCE is projected to show a 2.7% YoY increase in the same report. In the event that inflation data is higher than expected, this could help limit USD losses.
As for the Loonie, Bank of Canada (BoC) Governor Tiff Macklem said on Tuesday that it is reasonable to expect further rate cuts as the BoC has made progress in bringing inflation back to the 2% target. Meanwhile, falling crude oil prices could weigh on the commodity-linked CAD, as Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the value of the CAD.
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.
