- USD/CAD softens to around 1.3975 in Thursday’s early Asian session.
- US April CPI inflation came in cooler than expected, weighing on the US Dollar.
- Fed is expected to deliver gradual rate cuts starting later in the year.
The USD/CAD pair loses ground to near 1.3975 during the early Asian session on Thursday, pressured by a weaker US Dollar (USD). The US Retail Sales and Producer Price Index (PPI) for April will be the highlights later on Thursday, along with the speech from the Fed’s Chair Jerome Powell.
Tamer-than-expected US April inflation weighs on the Greenback against the Canadian Dollar (CAD). The US Consumer Price Index (CPI) increased by 2.3% YoY in April, compared to a rise of 2.4% in March, according to the US Bureau of Labor Statistics (BLS) on Tuesday. This reading came in below the market expectation of 2.4% and registered the smallest year-over-year gain in more than four years.
However, signs of de-escalation of a US-China trade war and easing fears of recession in the United States have prompted traders to raise their bets that the Fed policymakers will deliver gradual rate cuts later in the year instead of taking earlier. This, in turn, could provide some support to the US Dollar. Markets have dialed back expectations for rate cuts from the Fed this year, pricing in a 74% odds for the first cut of at least 25 basis points (bps) at the September meeting, according to LSEG data, compared with the prior view for a cut in July.
Meanwhile, a decline in Crude Oil prices might drag the commodity-linked Loonie lower and create a tailwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
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.
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