USD/CAD rises to fresh three-month highs near 1.3900
- USD/CAD appreciates ahead of the Fed’s July Meeting Minutes due on Wednesday.
- The US Dollar receives support from Ukraine-Russia peace hopes.
- The Canadian Dollar fell after softer inflation data reinforced dovish expectations for the BoC’s policy outlook.
USD/CAD continues to gain ground for the second successive day, trading around 1.3870 during the Asian hours on Wednesday. The pair appreciates as the US Dollar (USD) gains ground ahead of the US Federal Reserve’s (Fed) Minutes for the July meeting. Traders will shift their focus to the Jackson Hole Economic Policy Symposium due on Thursday, with Fed Chair Jerome Powell’s speech for guidance on a September policy decision.
The Greenback receives support from further geopolitical developments. White House press secretary Karoline Leavitt announced on Tuesday that plans for a bilateral meeting between Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskyy are now underway, according to CNN.
US President Donald Trump said on Tuesday that there won’t be American troops on the ground to help enforce a potential peace deal in Ukraine. The terms of security guarantees are still being negotiated between the US, European partners, and Ukraine.
The USD/CAD pair faced challenges as the Canadian Dollar (CAD) weakened, as softer inflation data from Canada, released on Tuesday, boosted dovish sentiment surrounding the Bank of Canada’s (BoC) policy outlook. Canada’s Consumer Price Index (CPI) rose 1.7% year-over-year in July, compared to 1.9% in June. This figure aligned with expectations. Meanwhile, the CPI climbed by 0.3%, an uptick from the 0.1% increase seen in the previous month. The core CPI, which excludes volatile elements like food and energy, increased 2.6% YoY and 0.1% MoM.
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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