USD/CAD posts modest gains above 1.3850 as Canadian CPI data raises odds of BoC rate cut
- USD/CAD trades with mild gains around 1.3870 in Wednesday's early Asian session.
- Canada's annual inflation rate eased to 1.7% in July from 1.9% in June.
- Traders brace for the FOMC Minutes later on Wednesday ahead of the Fed's Jackson Hole Economic Policy Symposium.
The USD/CAD pair posts modest gains near 1.3870 during the early Asian session on Wednesday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) as cooler Canadian inflation data raised expectations that the Bank of Canada (BoC) would cut interest rates in the coming months.
Data released by Statistics Canada on Tuesday showed that the headline Consumer Price Index (CPI) climbed 1.7% YoY in July, compared to 1.9% in June. This figure aligned with expectations. On a monthly basis, the CPI rose by 0.3%, an uptick from the 0.1% increase seen in the previous month.
Meanwhile, the core CPI monitored by the Bank of Canada (BoC), which excludes volatile elements like food and energy, experienced a year-over-year increase of 2.6% and a monthly rise of 0.1%.
The Loonie edges lower in an immediate reaction to the Canadian inflation report for July. Investors see a 39% odds of a rate cut from the BoC at the next policy decision in the September meeting, up from 31% before the CPI data, and have leaned heavily toward an easing of policy by October, according to Reuters.
Traders ramped up bets on a rate reduction at the Federal Reserve’s (Fed) September 16-17 meeting after a weak July jobs report and a cool CPI inflation report. However, a hotter-than-expected July Producer Price Index (PPI) reading has tempered some rate cut expectations.
Traders await the release of the FOMC Minutes later on Wednesday. The attention will shift to the Fed's Jackson Hole Economic Policy Symposium on Friday for further clues on US interest rate policy. Any dovish remarks from Fed officials could drag the Greenback lower against the CAD 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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