USD/CAD extends gains, nears 1.3900 ahead of the US inflation release

The US Dollar rallies for the third consecutive day against the Loonie and reaches three-week highs near 1.3900.
Soft US PPI data has eased concerns of stagflation and provided additional support to the USD.
The CAD is struggling amid weak domestic data and low Crude Oil prices.

Guillermo Alcala FXStreet

The US Dollar extends gains for the third consecutive day against its Canadian counterpart. The Greenback appreciates across the board on Thursday and has pushed the USD/CAD to fresh three-week highs, a few pips below 1.3900, after bouncing at 0.8790 lows earlier this month.

The focus today is on August’s US Consumer Prices Index figures, which are expected to confirm the moderate inflationary pressures anticipated by the Producer Prices Index reading seen on Wednesday, and pave the path for a Fed rate cut next week.

The US Dollar remains firm despite soft Inflation data

Consumer prices are expected to have ticked up to a 0.3% monthly rise and 2.9% year-on-year, from the previous month’s 0.3% and 2.7% respective readings. The core inflation, more relevant to the Fed, as it strips out seasonal influences from food and energy, is expected to have remained steady at 0.3% on a month-on-month basis and 3.1% year-on-year.,

On Wednesday, producer prices data revealed that inflation at the factory gate contracted 0.1% unexpectedly and eased to a 2.6% yearly growth in August, against market expectations of 0.7% and 3.3% respectively. These figures have eased concerns of stagflation, and the markets' relief is underpinning the US Dollar’s recovery on Thursday.

The Canadian Dollar, on the contrary, is struggling amid a combination of weak domestic data and low Oil prices. Canadian employment figures released last week revealed a sharp deterioration of the labour market, and the Ivey PMI dropped to levels close to stagnation, which has boosted hopes that the Bank of Canada will cut interest rates further at its September meeting.

Bank of Canada FAQs

What is the Bank of Canada and how does it influence the Canadian Dollar?

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

GBP/USD bounces back above 1.3200 despite political drama in UK

GBP/USD extends the rebound above 1.3200 in the second half of the day on Friday but the pair is still down more than 1% for the week. Stronger-than-expected UK Retail Sales data seem to be helping the British Pound limit its losses, while the chaotic UK political environment keeps the bulls at bay.

EUR/USD looks consolidative around 1.1460

EUR/USD stages a modest rebound after slipping to a three-month low below 1.1420 at the end of the week. That said, the pair now looks to consolidate humble gains just above 1.1460 despite growing uncertainty surrounding the next round of US-Iran negotiations, which keeps the US Dollar’s downside contained.

Gold remains below $4,200, looks to post weekly losses

Gold struggles to gather recovery momentum and trades below $4,200 in the American session on Friday, pressured by the hawkish Fed tone and the renewed uncertainty surrounding the next round of US-Iran talks. Despite the bullish action seen in the first half of the week, XAU/USD remains on track to close in negative territory.

Solana extends correction despite ETF inflows, RWA adoption

Solana (SOL) price edges below $70 extending its losses for the fourth straight day this week. The institutional demand for Solana is building, with steady inflows so far this week and Morgan Stanley’s amended S-1 filing for a Solana-focused Exchange-Traded Fund.

The Iran war didn't break the US economy, but what happens next?

Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock.

Regime change: Inside Kevin Warsh's first move to make the Fed unreadable on purpose

The rate did not move. That was the least interesting thing about Kevin Warsh's first meeting in charge of the Fed. The FOMC held its benchmark at 3.50%-3.75% for the fourth straight meeting, exactly as priced, and then the new chair used his first press conference to dismantle the machinery the market has leaned on for a decade.