USD/CAD gathers strength above 1.3750 after US CPI data

USD/CAD edges higher to around 1.3780 in Wednesday’s Asian session.
US CPI for July rose 2.7% YoY, while the core CPI climbed 3.1% YoY.
Lower crude oil prices weigh on the commodity-linked Loonie.

Lallalit Srijandorn FXStreet

The USD/CAD pair gathers strength to near 1.3780 during the Asian trading hours on Wednesday. A decline in crude oil prices weighs on the commodity-linked Canadian Dollar (CAD) and creates a tailwind for the pair. Federal Reserve (Fed) officials are set to speak later on Wednesday, including Austan Goolsbee and Raphael Bostic.

US inflation, as measured by the Consumer Price Index (CPI), remained unchanged at 2.7% on a yearly basis in July, the US Bureau of Labor Statistics (BLS) reported on Tuesday. This figure came in below the market expectation of 2.8%. The core CPI, which excludes the volatile energy and food industries, climbed by 3.1% YoY in July, compared to the 2.9% rise recorded in June and above the market consensus of 3%.

Cooler-than-expected CPI data and a soft labor market have thrown the Fed into a tight spot. Traders increase their bets that the US central bank will cut rates in the September meeting. According to the CME’s FedWatch tool, markets are now pricing in nearly a 94% chance of a Fed rate cut next month, up from an 85% possibility before the US inflation data release. Traders also raise their bets on rate reductions in October and December, which might cap the upside for the USD.

Meanwhile, extended losses in crude oil prices due to optimism over the proposed United States (US)-Russia meeting could undermine the Loonie against the USD. US President Donald Trump said last week that he would meet Russian President Vladimir Putin in Alaska on Friday to discuss the Ukraine issue. 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

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

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