USD/CAD crawls higher, approaches 1.3800 ahead of the US CPI release
- The US Dollar remains firm with all eyes on US consumer inflation figures.
- The Canadian Dollar struggles with Oil prices near two-month lows.
- US inflation is expected to have accelerated in July, which might dent hopes of immediate Fed easing.
The Canadian Dollar remains on its back foot against a slightly firmer US Dollar, weighed by the low Oil, which keeps the USD/CAD pair on track for a four-day winning streak, with all eyes on the US CPI report
Investors remain wary of selling US Dollars ahead of the release of July’s US inflation figures. The market consensus points to a moderate increase in inflationary pressures, which might dampen hopes of a September rate cut triggered by the weak US employment figures and dovish comments by Fed officials.
US Inflation data might curb hopes of Fed easing
The headline inflation is expected to have accelerated to a 2.8% year-on-year rate in July, from 2.5% in June and 2.4% in May, while the core inflation is seen at 3%, its highest rate since February.
The market remains wary of a larger-than-expected increase in inflation, which would confirm that the impact of tariffs has filtered through consumer prices, and might prompt Fed doves to reconsider their views. The risk is skewed to the upside for the US Dollar.
The Canadian Dollar, on the other hand, is struggling with Oil prices pinned near two-month lows, and the weak employment data seen on Friday that puts pressure on the Bank of Canada to ease interest rates further over the coming months.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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