USD/CAD remains steady above 1.3850, Fed rate cut pricing caps upside
- USD/CAD may lose ground as the US Dollar could struggle as softer PPI boosts Fed easing prospects for September.
- Traders await August US Consumer Price Index data, which could increase odds for a bumper Fed rate cut next week.
- The Bank of Canada is widely expected to resume its easing cycle this month after disappointing jobs data.
USD/CAD continues its winning streak for the third successive session, trading around 1.3870 during the Asian hours on Thursday. The upside of the pair could be restrained as the US Dollar (USD) could face challenges as traders fully price in a rate cut by the US Federal Reserve (Fed) in September, following softer-than-estimated US Producer Price Index (PPI) data.
Markets are now fully pricing in a 25 basis points (bps) rate cut at the Fed's September meeting, while the chance of a larger 50 bps reduction has also risen to nearly 12%, according to the CME FedWatch tool.
The US Bureau of Labor Statistics (BLS) reported on Wednesday 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.
Traders shift their focus toward the August US Consumer Price Index (CPI), due later today, which could strengthen expectations for a larger 50-basis-point Fed rate cut next week. The headline CPI is forecasted to rise by 2.9% YoY in August, while the core CPI is projected to increase 3.1% YoY during the same period.
The USD/CAD pair draws support as the Canadian Dollar (CAD) receives downward pressure from the rising expectations of the Bank of Canada (BoC) resuming its easing cycle this month after disappointing jobs data. The Unemployment Rate in Canada ticked up to 7.1% in August from 6.9% in July, which showed that US tariffs pressured slow hiring momentum and tightened activity across key sectors.
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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