USD/CAD gathers strength above 1.3850 as US CPI inflation data looms
- USD/CAD holds firm around 1.3875 in Thursday’s early European session.
- BoC rate cut expectation picks up steam, weighing on the Canadian Dollar.
- The US CPI inflation report for August will take center stage later on Thursday.
The USD/CAD pair extends its upside to near 1.3875 during the early European session on Thursday. Rising bets that the Bank of Canada (BoC) would resume its easing cycle undermine the Canadian Dollar (CAD) against the Greenback. All eyes will be on the US Consumer Price Index (CPI) for August, which will be published later on Thursday.
The Canadian economy lost 66,000 jobs in August, a sharp contrast to market expectations for a modest gain in employment numbers. The country’s Unemployment Rate edges higher to 7.1% during the same period, boosting the odds of a BoC rate reduction and weighing on the Loonie.
The Canadian central bank is widely expected to lower its key interest rate at its September policy meeting, with most economists anticipating a 25 basis points (bps) cut. Most economists believe a September rate cut won't be the last of the BoC's monetary easing in 2025, according to a recent Reuters poll.
"The market is readying itself for a Bank of Canada rate cut," said Amo Sahota, a director at Klarity FX in San Francisco. "That's weighing on the loonie just a little bit, but not by a sufficient amount to get us really motoring along,” added Sahota.
The Bureau of Labor Statistics will publish the CPI inflation report later in the day, which is expected to show an increase of 2.9% YoY in August, up from 2.7% in July. Meanwhile, the core CPI is projected to show a rise of 3.1% YoY in August, the same rate as in July, and tied for the highest since February. In case of a surprise softer US inflation, this could drag the USD lower in the near term.
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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