USD/CAD softens near 1.3650 on poor US inflation data, rising bets of Fed rate cut

USD/CAD remains weak near 1.3665 in Thursday’s early Asian session.
US CPI inflation rose to 2.4% in May vs. 2.5% forecast.
Extended gains in Crude Oil prices support WTI price.

Lallalit Srijandorn FXStreet

The USD/CAD pair remains on the defensive around 1.3665 during the early Asian session on Thursday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) due to poor US inflation data and rising bets of a Federal Reserve (Fed) rate cut in September. The US Producer Price Index (PPI) will be the highlight later on Wednesday, seconded by weekly Initial Jobless Claims.

Data released by the US Bureau of Labor Statistics (BLS) on Wednesday showed that the US Consumer Price Index (CPI) rose 2.4% on a yearly basis in May, compared to 2.3% in April. This figure came in below the market consensus of 2.5%.

Meanwhile, the core CPI, which excludes volatile food and energy prices, rose 2.8% YoYi n May, softer than the 2.9% expected. On a monthly basis, the CPI and the core CPI both increased 0.1%, against analysts' estimate of 0.2% and 0.3%, respectively.

The Greenback came under selling pressure with the immediate reaction. Interest-rate swaps showed that traders see a 75% chance that the Fed will cut borrowing costs by September.

Extended rise in Crude Oil prices might boost the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive 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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