USD/CAD remains limited below 1.3800, Loonie lacks bullish momentum
- The Canadian Dollar trims some losses but remains within previous ranges.
- Moderate US inflation and higher hopes of Fed cuts are weighing on the US Dollar.
- The extended decline in Crude prices keeps CAD’s upside attempts limited.
The Canadian Dollar is drawing some support from the generalised US Dollar weakness, as the moderate US inflation figures seen on Tuesday boosted expectations of Fed monetary easing in September. The pair, however, remains within previous ranges, as the Loonie lacks upside momentum.
US CPI figures revealed that consumer inflation continued to grow at a steady 2.7% year-on-year pace in July, against market expectations of a 2.8% reading. The core CPI accelerated to a five-month high of 3.1% from 2.9% in June, beating expectations of a softer increase to 3.0%.
The data eased concerns about the inflationary impact of tariffs, and futures markets ramped up bets of a quarter-point rate cut after the summer, to 95%, from 85% before the data release. The higher appetite for risk is weighing on US Treasury yields and the US Dollar.
The Canadian Dollar, on the other hand, is lacking bullish momentum to perform a stronger recovery. The decline in Oil prices, which are nearing the $62.00 level after losing nearly $8 so far in August, is weighing heavily on the Canadian Dollar, as Canada’s economy is heavily dependent on Crude exports.
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.
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.
