Canadian Dollar weakens to near 1.3750 on softer Canadian CPI, US-Iran diplomatic hopes
- USD/CAD strengthens around 1.3765 in Thursday’s early European session.
- Canada's CPI inflation accelerated to 2.8% YoY in April, but was softer than expected.
- Fed minutes showed a majority open to rate hikes if inflation persists.
The USD/CAD pair gathers strength to near 1.3765 during the early European session on Thursday. The Canadian Dollar (CAD) softens against the US Dollar (USD) on cooling domestic inflation data and a decline in crude oil prices. Traders will keep an eye on the preliminary readings of the US Purchasing Managers Index (PMI) for May, which is due later in the day.
Canada's Consumer Price Index (CPI) inflation climbed to 2.8% YoY in April from 2.4% in March, driven largely by a surge in gasoline prices after the Iran war pushed global crude oil prices sharply higher. This figure registered the highest level in two years. However, the reading came in below the market expectations of 3.1%. A softer-than-expected Canada inflation report could weigh on the CAD and against the Greenback in the near term.
US President Donald Trump said on Wednesday the US is in the "final stages" with Iran, bolstering hopes that crude supplies will soon start flowing out of the Strait of Hormuz, per Bloomberg.
Optimism over a possible US-Iran agreement might drag the crude oil prices lower, weighing on the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and lower crude oil prices generally have a negative impact on the CAD.
Minutes of the April Federal Open Market Committee (FOMC) meeting released on Wednesday showed that a majority of Federal Reserve (Fed) officials warned the central bank would likely need to consider hiking interest rates if inflation continued to run persistently above their 2% target.
The minutes highlighted the deepening concern among Fed officials about inflationary pressures driven by the Iran war. The hawkish stance of the US central bank could lift the USD against the CAD.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge 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 sentiment surveys can all 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 put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
