USD/CAD posts modest gains above 1.3750 ahead of Canadian GDP, US PCE releases
- USD/CAD edges higher to around 1.3755 in Friday’s early Asian session.
- The US economy grew 3.3% in Q2, stronger than expected.
- Higher crude oil prices might boost the Loonie and cap the upside for the pair.
The USD/CAD pair trades with mild gains near 1.3755 during the early Asian session on Friday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) after the upbeat US Gross Domestic Product (GDP) and weekly Initial Jobless Claims data. The Canadian GDP for the second quarter (Q2) and the US Personal Consumption Expenditures (PCE) Price Index report for July will be the highlights later on Friday.
Data released by the US Bureau of Economic Analysis (BEA) on Thursday showed that the US GDP expanded at an annual rate of 3.3% in Q2. This figure came in stronger than the initial estimate of 3% and the expectation of 3.1%, respectively. Meanwhile, the number of US citizens submitting new applications for unemployment insurance for the week ending August 23 declined to 229K, compared to 234K (revised from 235K) in the previous week. This reading came in below the market consensus of 230K.
The Greenback edges higher in an immediate reaction to the better-than-expected US economic data. However, traders remain cautious ahead of the release of US PCE inflation data, the Fed’s favored price gauge, later on Friday. According to CME's FedWatch tool, traders are now pricing in around an 85% chance of a quarter-point rate cut from the Federal Reserve (Fed) next month.
Meanwhile, a rise in crude oil prices might support the commodity-linked Loonie and create a headwind for the pair. 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 GDP is expected to contract at an annual rate of 0.6% in Q2, compared to an expansion of 2.2% in Q1. If the report shows a stronger-than-expected outcome, this could lift the CAD and help limit the pair’s losses 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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