USD/CAD drifts higher above 1.4050 as Canadian CPI inflation looms
- USD/CAD strengthens to around 1.4060 in Tuesday’s early European session.
- Business sentiment improved, but firms are still cautious amid US tariffs, the BoC noted.
- BoC rate cut bets and lower crude oil prices weigh on the Loonie.
The USD/CAD pair gathers strength to near 1.4060 during the early European trading hours on Tuesday. The Canadian Dollar (CAD) edges lower against the US Dollar (USD) as oil prices fall and the Bank of Canada (BoC) Business Outlook Survey supports expectations for another interest rate cut this month.
Canadian firms feel conditions are slightly better than earlier in the year, but they are unlikely to boost investments or hiring given the dampening effect of US tariffs, according to a BOC survey on Monday. The survey also suggested that inflation expectations are relatively well contained, and the report supports another 25 basis points (bps) rate cut from the Canadian central bank next week. This, in turn, undermines the CAD and creates a tailwind for the pair.
Money markets are now pricing in nearly a 77% chance of a 25 bps rate reduction in the October meeting, according to Reuters. Last month, the BoC lowered its benchmark rate to a three-year low of 2.50%.
Additionally, Crude oil price declines to a five-month low amid concerns over excess supply, which weigh on the commodity-linked Loonie. 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.
Traders will keep an eye on the Canadian Consumer Price Index (CPI) inflation data for September later on Tuesday. The headline CPI is expected to see an increase of 2.3% YoY in September, compared to 1.9% in August. Any signs of a hotter-than-expected inflation could boost the CAD in the near term.
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. 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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