USD/CAD posts modest losses below 1.3750 amid muted chance of BoC rate cut
- USD/CAD softens to around 1.3720 in Wednesday’s early Asian session.
- Canadian annual inflation rate increases to 1.9% in June, hotter than expected.
- A softer US CPI report might appear to boost the odds of a Fed September rate cut.
The USD/CAD pair trades with mild losses near 1.3720 during the early Asian session on Wednesday. Hotter Canadian inflation data reduced expectations for Bank of Canada (BoC) interest rate cuts, supporting the Canadian Dollar (CAD). The US Producer Price Index (PPI) will take centre stage later on Wednesday, followed by the Fed Beige Book and Industrial Production.
Data released by Statistics Canada on Tuesday showed that the country’s Consumer Price Index (CPI) rose 1.9% YoY in June versus 1.7% prior. This figure came in line with the market consensus. Meanwhile, the BoC CPI core, one of the core measures of inflation closely tracked by the BoC, climbed 2.7% YoY in June, compared to 2.5% in the previous reading. The Loonie attracts some buyers in an immediate reaction to the uptick in inflation data.
"Today's uptick in core inflation coupled with the upside surprise in June's labor report means the BoC is highly unlikely to cut in July," said analyst Carlos Capistran at BofA Global Research. Investors see a 5% odds the BoC cuts its benchmark interest rate from the current rate of 2.75% at the next policy meeting on July 30, down from a 14% possibility before the Canadian CPI report.
Underlying US inflation rose by less than estimated for a fifth month in June, raising questions as to how broadly US President Donald Trump’s tariffs will impact consumer prices. Markets expect the US Federal Reserve (Fed) to stay on hold at the July meeting and then reduce by a quarter percentage point in September. Traders will take more cues from the US PPI inflation report later on Wednesday for fresh impetus.
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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