USD/CAD remains subdued near 1.3800 ahead of US economic data
- USD/CAD loses ground as the US Dollar struggles amid the rising likelihood of a Fed rate cut in September.
- US July Retail Sales data and the preliminary Michigan Consumer Sentiment Index will be eyed on Friday.
- The BoC could opt for a rate cut if economic conditions weaken and trade-driven inflation pressures ease.
USD/CAD retraces its recent gains registered in the previous session, trading around 1.3800 during the early European hours on Friday. The pair depreciates as the US Dollar (USD) declines amid rising odds of the Federal Reserve (Fed) reducing interest rates in September. CME’s FedWatch tool indicates that Fed funds futures traders are now pricing in nearly a 93% chance of a 25 basis point (bps) interest rate cut at the September meeting.
However, the USD/CAD registered nearly 0.5% gains in the previous session as the Greenback advanced amid stronger US economic data. Traders await the US July Retail Sales data and the preliminary Michigan Consumer Sentiment Index due later in the North American session.
The US Producer Price Index (PPI) climbed 3.3% YoY in July, against the previous increase of 2.4% and the expected 2.5% rise. The annual core PPI climbed 3.7% in July, compared to 2.6% in June and the 2.9% expected. US Initial Jobless Claims for the week ending August 8 fell to 224K versus 227K prior (revised from 226K). This figure was below the market consensus of 228K.
The USD/CAD pair may further appreciate as the Canadian Dollar (CAD) could face challenges as the Bank of Canada’s (BoC) Minutes for the July meeting indicated fresh concerns. BoC policymakers emphasized a shorter-term decision horizon amid elevated uncertainty, noting that a rate cut may be warranted if economic conditions deteriorate and trade-driven inflation pressures subside.
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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