USD/CAD remains steady above 1.3700 ahead of US PPI data
- The US Dollar maintains a moderate bullish trend against the Canadian Dollar, buoyed by the cautious market mood.
- Higher US inflation and hopes of higher Fed rates for longer are underpinning the US Dollar.
- The recent decline in Oil prices is adding negative pressure on the commodity-sensitive Loonie.
The US Dollar is trading practically flat near 1.3720 against the Canadian Dollar on Wednesday, with downside attempts limited above 1.3700 and on track to close a four-day winning streak, as hotter US inflation figures have hammered hopes of Fed cuts in the near-term
On Tuesday, data from the US Bureau of Labour Statistics showed that consumer inflation accelerated in June, displaying generalised price rises in a wide range of products, especially on imported goods. These figures confirm that Trump’s tariffs are starting to filter through the economy and dampen expectations of Fed cuts.
Dwindling bets of Fed cuts are supporting the USD
Bets on a June cut were dialed down to 3% following the CPI report, from above 6% one day earlier, while chances of a September cut declined to 54% from above 60% a day before and nearly 70% in the previous week.
Dallas Fed President, Lorie Logan, confirmed those views, affirming that the bank might need to keep interest rates at the current levels for some time to assure that inflation returns to the bank’s 2% target level.
In Canada, Consumer Prices also accelerated in June, as data released on Tuesday showed. The positive impact from these figures in the Loonie, however, has been offset by the recent Oil prices, which is Canada’s main export.
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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