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.
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
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.
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.
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.
