USD/CAD extends gains on softer Canada inflation, firmer US Dollar
- USD/CAD extends gains for a fifth straight day as Canadian inflation undershoots forecasts.
- Annual CPI eases to 2.3%, reinforcing expectations for a steady BoC monetary policy stance.
- A firmer US Dollar and upbeat US data provide additional support to the pair.
The Canadian Dollar (CAD) weakens against the US Dollar (USD) on Tuesday after softer-than-expected headline inflation data reinforced signs of easing price pressure. At the time of writing, USD/CAD is trading around 1.3676, extending gains for a fifth consecutive day.
Data released by Statistics Canada showed that the Consumer Price Index (CPI) was flat on a monthly basis in January, coming in at 0.0%, below the 0.1% forecast and rebounding from December’s -0.2% decline. On an annual basis, CPI eased to 2.3% in January from 2.4% previously, also missing market expectations of 2.4%.
Meanwhile, the Bank of Canada’s (BoC) preferred core inflation measures also reflected a modest rebound. The BoC Core CPI rose 0.2% MoM in January, recovering from December’s 0.4% decline. On a yearly basis, Core CPI eased to 2.6% YoY from 2.8% previously.
The data reinforced expectations that the Bank of Canada (BoC) is likely to keep interest rates on hold in the near term. At its January meeting, policymakers noted that monetary policy remains focused on keeping inflation close to the 2% target, while reaffirming that the central bank stands ready to adjust its stance if the outlook changes materially.
In the January Monetary Policy Report, officials projected CPI to average 2.0% in 2026, slightly below the prior 2.1% estimate, before rising to 2.1% in 2027.
Oil prices are also weighing on the Loonie, given Canada’s status as a major crude exporter. West Texas Intermediate (WTI) crude came under pressure after signs of progress emerged from the second round of high-level US-Iran nuclear talks held in Geneva.
Iran’s Foreign Minister said the two sides had reached “an understanding on the main principles." At the time of writing, WTI is trading near $62.35, down roughly 1.95% on the day.
At the same time, a stronger US Dollar is reinforcing upward pressure on USD/CAD. The US Dollar Index (DXY), which tracks the Greenback’s performance against a basket of six major currencies, extends its recovery and trades near 97.34, up around 0.25%.
On the data front, the NY Empire State Manufacturing Index rose to 7.1 in February, beating market expectations of 6.0, though easing slightly from the previous reading of 7.7. Meanwhile, the ADP Employment Change four-week average increased to 10.3K, up from a revised 7.8K (previously 6.5K).
Market participants are reassessing the timing of Federal Reserve (Fed) interest-rate cuts following last week’s US economic releases. Stronger-than-expected labour figures reduced the likelihood of an immediate rate cut, while softer inflation readings supported the view that the Fed could resume its easing cycle later in the year.
Looking ahead, attention now turns to the Federal Open Market Committee (FOMC) meeting minutes on Wednesday, followed by the Core Personal Consumption Expenditures (PCE) Price Index and the advance estimate of fourth-quarter Gross Domestic Product (GDP) on Friday.
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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