USD/CAD holds firm above 1.3850 as traders pile into BoC rate cut bets
- USD/CAD strengthens near 1.3860 in Thursday’s early Asian session.
- Traders piled into bets that the BoC is set to cut rates soon.
- US PPI fell 0.1% MoM in August, softer than expected.
The USD/CAD pair gains ground for a second consecutive day around 1.3860 during the early Asian session on Thursday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) amid expectations that the Bank of Canada (BoC) would resume its easing cycle this month. The US Consumer Price Index (CPI) for August will take center stage later on Thursday.
Investors see a nearly 90% odds that the BoC will lower interest rates next Wednesday, as recent employment data and ongoing tariff uncertainty have strengthened the case for a rate cut. Canadian job data showed that US tariffs pressured slow hiring momentum and tightened activity across key sectors. The Unemployment Rate in Canada ticked up to 7.1% in August from 6.9% in July, above the expectation of 7.0%. The Canadian central bank has held its benchmark rate at 2.75% since March.
On the other hand, the softer-than-estimated US Producer Price Index (PPI) could drag the Greenback lower. Data released by the US Bureau of Labor Statistics (BLS) on Wednesday showed that the US PPI inflation declined to 2.6% on a yearly basis in August from 3.3% in July. This figure came in below the market consensus of 3.3%. On a monthly basis, the PPI declined by 0.1% in August, compared to the 0.7% increase (revised from 0.9%) prior.
The lack of strong producer price pressures indicated softening domestic demand against the backdrop of a struggling labor market. This report reinforced the case for interest rates from the Federal Reserve (Fed) at its policy meeting next Wednesday.
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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