USD/CAD weakens to near 1.4350 on cooler-than-expected US PPI inflation data

USD/CAD softens to near 1.4350 in Wednesday’s early Asian session.
US inflation is still slowing as the PPI came in below expectations in December.
Higher crude oil prices support the commodity-linked Loonie.

Lallalit Srijandorn FXStreet

The USD/CAD pair remains on the defensive around 1.4350 during the early Asian session on Wednesday, pressured by the disappointing US December Producer Price Index (PPI) data. Market participants will keep an eye on the US Consumer Price Index (CPI) inflation data, which is due later on Wednesday. Also, the Federal Reserve’s (Fed) Thomas Barkin, Neel Kashkari, John Williams, and Austan Goolsbee are set to speak.

The US Dollar (USD) weakens against the Loonie after cooler-than-expected PPI inflation data. Data released by the Bureau of Labor Statistics on Tuesday showed that PPI for final demand rose 0.2% MoM in December after an unrevised 0.4% advance in November, softer than the 0.3% expected. The PPI climbed 3.3% YoY in December, the most since February 2023, after increasing 3.0% in November. This reading came in below the consensus of 3.4%.

However, the threat of tariffs by President-elect Donald Trump's incoming administration and the prospect of fewer Fed rate cuts could lift the US Treasury yields and support the USD. "The risks are for less cuts ... but we expect continued progress on the inflation front could keep the Fed on track to deliver a rate cut at the March meeting," said Matthew Martin, a senior U.S. economist at Oxford Economics.

On the other hand, a rise in crude oil prices amid wider United States (US) sanctions on Russian oil boosts the commodity-linked Loonie and creates a headwind for the pair. It's worth noting that Canada is the largest oil exporter to the United States (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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