USD/CAD holds gains near 1.3850 ahead of Michigan Consumer Sentiment Index
- USD/CAD edges higher despite rising bets of a Fed rate cut next week.
- The US Dollar could weaken as the odds of a half-point rate cut by the Federal Reserve increase.
- Canada’s weak labor and inflation data strengthen expectations of an imminent BoC rate cut.
USD/CAD edges higher after registering gains of around a quarter of a percent in the previous session, trading around 1.3840 during the Asian hours on Friday. The pair gains ground as the US Dollar (USD) recovers its recent losses ahead of the University of Michigan Consumer Sentiment Index due later in the day.
However, the upside of the USD/CAD pair could be restrained as the US Dollar could face challenges as soft United States (US) jobs data outweighs hotter inflation, bolstering expectations of a Federal Reserve (Fed) 25 basis-point rate cut next week. The chance that the US central bank will cut by a half percentage point also edges higher.
US Consumer Price Index (CPI) climbed 2.9% year-over-year in August, as expected, but came in higher than 2.7% in July. The CPI inflation climbed to 0.4% MoM from a 0.2% increase prior. The core CPI, which excludes volatile food and energy prices, increased 3.1% on a yearly basis in August, matching the estimate. US Initial Jobless Claims rose to 263K, the highest since 2021, against the expected 235K and 236K prior (revised from 237K).
The USD/CAD pair may also draw support as the Canadian Dollar (CAD) could face challenges, as softer Canadian labor and inflation data boost market confidence in an imminent Bank of Canada (BoC) rate cut. Markets currently price about a 70% chance of a cut next week, with a weak CPI print likely to lift expectations further.
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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