USD/CAD tumbles to near 1.3600 on cooling US PPI data
- USD/CAD remains under selling pressure around 1.3600 in Friday’s early Asian session.
- US PPI rose 0.1% MoM in May, softer than expected.
- Rising oil prices amid geopolitical risks could support the commodity-linked Loonie.
The USD/CAD pair edges lower to near 1.3600, its lowest since October 2024, during the early Asian session on Friday. Broad US Dollar (USD) weakness, driven by softer-than-expected US inflation data and a repricing of Federal Reserve (Fed) policy, acts as a headwind for the pair. The advanced US Michigan Consumer Sentiment will take center stage later on Friday.
Data released by the Bureau of Labor Statistics on Thursday showed that the US Producer Price Index (PPI) rose 0.1% MoM in May, compared to a decline of 0.2% (revised from -0.5%). This reading came in softer than the expectation of a 0.2% rise. Excluding food and energy, the core PPI also increased 0.1% MoM in May versus -0.2% prior (revised from -0.4%), below the consensus of 0.3%.
US Treasury yields and the Greenback declined after the PPI reports as investors boosted odds the US central bank will cut rates later this year. The Fed is anticipated to leave its policy rate in the 4.25%-4.50% range at the June meeting. However, traders now expect a 25 basis points (bps) rate cut by September, with another such move likely in October. Before Thursday's PPI data, traders projected the Fed to wait until December to deliver a second rate cut.
Meanwhile, a rise in Crude Oil prices amid escalating geopolitical tensions in the Middle East might boost the commodity-linked Loonie. US and Israeli officials said an Israeli attack on Iran could come within days, according to the Wall Street Journal late Thursday. 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 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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