USD/CAD flat lines near 1.3700, US/Canadian CPI inflation data in focus
- USD/CAD trades flat around 1.3705 in Tuesday’s early Asian session.
- Tariff threats could weigh on the Loonie, but stronger Canadian June job data might cap its downside.
- The CPI inflation data for June from the US and Canada will be in the spotlight later on Tuesday.
The USD/CAD pair holds steady around 1.3705 during the early Asian session on Tuesday. Traders largely shrugged off fresh tariffs ahead of Consumer Price Index (CPI) inflation data from the United States (US) and Canada on Tuesday.
Last week, US President Donald Trump announced a 35% tariff rate for goods imported from Canada, beginning August 1. The new measures come on top of existing 50% tariffs on Canadian steel and aluminum. Additionally, Trump also imposed a new 50% tariff on US copper imports, beginning on the same period. Concerns that US tariffs would impact the Canadian economy could undermine the Loonie, as Canada is a major trading partner and a significant supplier of copper to the US.
On the other hand, the upbeat Canadian June employment data could boost the Canadian Dollar (CAD) against the Greenback. Statistics Canada revealed on Friday that the Unemployment Rate in Canada ticked lower to 6.9% in June from 7.0% in May. This figure came in stronger than the 7.1% expected. Meanwhile, the Canadian economy added 83.1K jobs in June versus 8.8K prior. Economists were expecting no change in employment.
Money markets have priced in nearly an 84% chance that the Bank of Canada will hold the interest rate in the July meeting, according to Reuters. The BoC is anticipated to reduce rates in the second half of the year. Still, it will be difficult for BoC policymakers to chart a rate path, given all the economic uncertainty.
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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