USD/CAD trades flat above 1.3750, all eyes on US CPI release
- USD/CAD flatlines around 1.3775 in Tuesday’s early Asian session.
- Traders brace for the US July CPI, which is due later on Tuesday.
- Canada's economy shed over 40,000 jobs in July; the Unemployment Rate held steady at 6.9%.
The USD/CAD pair trades on a flat note near 1.3775 during the early Asian session on Tuesday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) as traders turn cautious ahead of a key US inflation report later on Tuesday. Additionally, Federal Reserve (Fed) officials are scheduled to speak, including Thomas Barkin and Jeffrey Schmid.
Traders adjusted their expectations for interest rate reductions from the US central bank after soft data on US jobs last week. The release of the US July Consumer Price Index (CPI) will be in the spotlight later in the day, as it might offer more hints as to whether the Fed lowers borrowing costs in the September meeting. Any signs of cooling inflation could cement bets for a cut next month and drag the USD lower against the CAD.
Recent Canadian job data has prompted expectations for a Bank of Canada (BoC) interest rate cut, which weighs on the CAD. Canada's economy shed 40,800 jobs in July, compared to a gain of 83,100 jobs in the previous session, Statistics Canada reported on Friday. This figure came in worse than the estimations of 13,500 job additions.
Meanwhile, the Unemployment Rate held steady at 6.9% in July, below the market consensus of 7.0%. Investors see a nearly 36% odds the BoC reduces rates at its next policy decision on September 17, up from 17% at the start of the month, according to Reuters.
A fall in crude oil prices due to optimism over the proposed United States (US)-Russia meeting also undermines the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative 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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