USD/CAD flat lines near 1.3800 ahead of Canadian CPI inflation data
- USD/CAD holds steady around 1.3800 in Tuesday’s early Asian session.
- Trump begins planning for a trilateral meeting with Putin and Zelenskyy.
- The possibility of a Fed cut in September stays at 83%.
The USD/CAD pair extends its ongoing range-bound theme near 1.3800 during the early Asian session on Tuesday. Investors remain cautious as US President Donald Trump begins planning for a trilateral meeting with Russian President Vladimir Putin and Ukrainian leader Volodymyr Zelenskiy. The Canadian July Consumer Price Index (CPI) inflation report will be in the spotlight later on Tuesday.
Trump said late Monday that he was working to arrange a meeting between Putin and Zelensky after a summit with Zelensky and European leaders at the White House. Trump further stated that Zelenskiy could end the war, raising the prospect of Kyiv being forced into making unpalatable territorial concessions.
Trump's hopes of achieving an immediate peace deal have given way to much softer suggestions that a partial peace agreement may be reached in the coming weeks. However, any signs of escalating tensions could weigh on the riskier currency, such as the Canadian Dollar (CAD), and create a tailwind for the pair.
Traders pared bets on a rate cut at the US Federal Reserve (Fed) meeting on September 16-17 after the Producer Price Index (PPI) inflation was hotter than expected in July, which might support the US Dollar (USD). According to the CME FedWatch tool, Fed fund futures traders are now pricing in an 83% chance of a September rate cut, after last week briefly fully pricing in a move. Traders will closely monitor the Fed's Jackson Hole symposium later on Friday for rate clues.
Meanwhile, a recovery in crude oil prices could lift 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
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.
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