Canadian Dollar strengthens ahead of Canadian CPI inflation release
- USD/CAD loses traction to near 1.3685 in Friday’s early European session.
- Trump said the second round of meetings between the US and Iran could take place over the weekend.
- The Canadian March CPI inflation report will take center stage on Friday.
The USD/CAD pair extends its downside to around 1.3685 during the early European trading hours on Friday. Reports of a ceasefire between Israel and Lebanon reduce safe-haven demand for the US Dollar (USD). The Canadian March Consumer Price Index (CPI) inflation data will be in the spotlight later on Friday.
US President Donald Trump said on Thursday that the US and Iran are "very close" to making a deal and that negotiations could resume as early as this weekend. His remarks came as a 10-day ceasefire between Israel and Lebanon had taken effect. Traders will also keep an eye on a second round of talks between the US and Iran that could take place this weekend. Any signs of hope for peace in the Middle East could weigh on the Greenback in the near term.
Rising crude oil prices and supply disruptions related to the Middle East conflict are expected to drive gasoline prices up significantly in the March report. BMO Capital Markets analysts suggested that these energy costs could push headline inflation back toward 3% in the coming months.
The Bank of Canada (BoC) Governor Tiff Macklem said that the central bank will "look through" immediate inflation spikes from higher energy prices but stands ready to respond if these pressures broaden into the wider economy.
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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