USD/CAD strengthens to near 1.4050 ahead of Canadian CPI inflation release
- USD/CAD drifts higher to around 1.4045 in Tuesday’s Asian session.
- Trump said his 100% tariff on China is not sustainable, easing fears of trade tensions.
- Traders await the Canadian September CPI inflation data and Fed’s Waller speech later on Tuesday.
The USD/CAD pair edges higher to near 1.4045 during the Asian trading hours on Tuesday. The Canadian Dollar (CAD) softens against the US Dollar (USD) on a decline in crude oil prices. The Canadian Consumer Price Index (CPI) inflation data for September will be the highlight later on Tuesday. Also, the Federal Reserve (Fed) Bank Governor Christopher Waller is scheduled to speak.
Crude oil price declines to a five-month low as supply glut fears mount, which undermine the commodity-linked Loonie and create a tailwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
Meanwhile, US-China trade tensions ease after US President Donald Trump said on Friday that 100% tariffs on China are unsustainable and he still plans to meet China’s President Xi Jinping. Investors will closely monitor further updates on US-China trade talks. Any signs of de-escalating trade tensions between the world’s two largest economies could lift the Greenback against the CAD in the near term.
However, the US federal government shutdown has entered its fourth week with no clear end in sight, marking the third-longest funding lapse in modern history. The GOP-backed bill failed to pass the Senate for the 11th time on Monday. The 50-43 vote fell mostly along party lines. Concerns that the extended US government shutdown could impact economic activity could drag the USD lower.
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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