Canadian Dollar flat lines near 1.3700 amid hot US CPI inflation, US-Iran tensions
- USD/CAD holds steady around 1.3695 in Wednesday’s early Asian session.
- US CPI came in hotter than expected in April, rising by 3.8% YoY.
- Higher crude oil prices could support the commodity-linked Canadian Dollar.
The USD/CAD pair trades on a flat note near 1.3695 during the early Asian trading hours on Wednesday. Traders continue to assess hot US inflation data and ongoing tensions in the Middle East. The US April Producer Price Index (PPI) report will take center stage later on Wednesday.
In April, the US Consumer Price Index rose 0.6%, putting the annual inflation rate at 3.8%, according to the Bureau of Labor Statistics on Tuesday. That annual inflation rate was the highest since May 2023.
Meanwhile, the core CPI, which excludes volatile food and energy prices, rose 0.4% and 2.8% on a monthly and yearly basis, respectively. The hotter US inflation data has reinforced the hawkish outlook that the Federal Reserve (Fed) will keep interest rates elevated, which could lift the US Dollar (USD) against the Canadian Dollar (CAD).
On the other hand, rising crude oil prices due to concern over the prolonged closure of the Strait of Hormuz and Middle East uncertainty could underpin the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and higher crude oil prices generally have a positive impact on the Canadian Dollar (CAD).
Traders will closely monitor the US President Donald Trump-Chinese President Xi Jinping meeting in Beijing on Thursday and Friday. It will be Trump’s first trip to China since 2017. According to Bloomberg, Trump said that he would prioritize trade discussions during his summit with Chinese President Xi Jinping and downplayed the amount of attention they would devote to the Iran war.
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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