USD/CAD posts modest gains near 1.3500, all eyes on US PCE data

USD/CAD trades on a stronger note around 1.3490 in Friday’s early Asian session.
The second estimate of US GDP for Q2 2024 came in better than expected, growing by 3.0% vs. 2.8% prior.
Higher crude oil prices might support the Loonie and cap the pair’s upside.

Lallalit Srijandorn FXStreet

The USD/CAD pair trades with mild gains near 1.3490 during the early Asian session on Friday. The stronger-than-expected US economic growth provides some support to the US Dollar (USD). The markets might turn cautious ahead of the key US economic data, which is due later in the day.

Data released by the US Bureau of Economic Analysis (BEA) showed on Thursday that the US Gross Domestic Product Annualized for the second quarter (Q2) grew 3.0% in the second estimate from 2.8% in the initial estimate. This figure came in better than the expectation of 2.8%.

Meanwhile, the weekly Initial Jobless Claims for the week ending August 24 declined from 233K to 231K, below the market consensus of 232K. The US Dollar gains ground above the key 101.00 barrier in immediate reaction to the upbeat US economic data.

Federal Reserve Atlanta President Raphael Bostic, a leading FOMC hawk, said on Thursday that it might be "time to move" on rate cuts as inflation cools down further and the unemployment rate up more than he expected, but he wants to see confirmation from the monthly jobs report and two inflation reports due before the Fed September meeting.

Investors will closely monitor the release of the US Personal Consumption Expenditure (PCE) Price Index for July for some hints about the US interest rate path. A softer-than-expected PCE reading could trigger the Federal Open Market Committee (FOMC) to start a rate-cutting cycle, which acts as a headwind for the Greenback.

On the Loonie front, the rebound of crude oil prices might lift the commodity-linked Canadian Dollar (CAD) as Canada is the leading exporter of oil to the United States. However, economists anticipate the Bank of Canada (BoC) to cut additional interest rates for a third consecutive meeting next week due to persistent economic weakness, rising unemployment, and cooling down inflation. This, in turn, might drag the CAD lower against the USD.

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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