- USD/CHF gains strength near 0.8525 in early European session on Tuesday.
- Swiss CPI rose 1.1% year-on-year in August; the Swiss economy grew 0.7% year-on-year in the second quarter.
- Rising US Treasury yields are supporting the dollar, but firm expectations of a Fed rate cut could limit its upside.
The USD/CHF pair extended its gains amid firming US Dollar (USD) around 0.8525 during early European trading hours on Tuesday. Swiss inflation was softer than expected in August, but the economy grew more than estimated. Investors are bracing for the US ISM manufacturing PMI data, due later on Tuesday.
Data released by the Swiss Federal Statistical Office on Tuesday showed that the country’s Consumer Price Index (CPI) rose 1.1% year-on-year in August, compared with the previous reading of 1.3%. This figure was below the market consensus of 1.2%. On a monthly basis, CPI inflation was unchanged in August from a 0.2% drop in July, softer than expectations for a 0.1% increase.
Moreover, Switzerland’s economy grew at a faster-than-expected pace in the second quarter (Q2). Swiss Gross Domestic Product (GDP) expanded by 0.7% quarter-on-quarter, compared to the 0.5% expansion in the previous reading, stronger than the 0.5% estimate. However, upbeat Swiss GDP growth data fails to boost the Swiss Franc (CHF) in an immediate reaction to the mixed readings.
As for the USD, rising US Treasury bond yields are providing some support to the greenback. However, the pair’s upside could be limited as traders expect the Federal Reserve (Fed) to cut interest rates in September. The US Non-Farm Payrolls (NFP) report for August, due on Friday, could offer further clues on the pace and size of the Fed’s rate cuts. Financial markets have priced in around a 69% probability of a 25 basis points (bps) rate cut by the Fed in September, while the odds of a 50 bps reduction stand at 31%, according to the CME FedWatch tool.
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.
