USD/CAD trades with mild gains above 1.3650, US Retail Sales in focus
- USD/CAD posts modest gains near 1.3685 in Thursday’s early Asian session.
- Canadian inflation rose to 1.9% in June, reducing expectations for BoC rate reductions.
- The US PPI inflation was unchanged in June, softer than expected.
The USD/CAD pair trades with mild gains around 1.3685 during the early Asian session on Thursday. The reduced bets on Bank of Canada (BoC) interest rate cuts provide some support to the Canadian Dollar (CAD). Traders will keep an eye on the US Retail Sales for June, followed by weekly Initial Jobless Claims and Philly Fed Manufacturing Index due later on Thursday.
Canada’s inflation, as measured by the Consumer Price Index (CPI), rose to 1.9% YoY in June from 1.7% in May, Statistics Canada data reported Tuesday. Economists broadly expect that the new report will make a BoC interest rate cut on July 30 unlikely. Investors see a 5% possibility that the Canadian central bank cuts its benchmark interest rate from the current rate of 2.75% at the July meeting, down from a 14% chance before the Canadian CPI report.
On the USD’s front, the Producer Price Index (PPI), a measure of wholesale costs, was unexpectedly unchanged in June. This figure came in below the market consensus of 0.2%. Meanwhile, the core PPI rose by 2.6% YoY in June versus 3.0% prior, softer than the 2.7% expected.
The wholesale inflation report supports expectations that the US Federal Reserve (Fed) will leave its benchmark overnight interest rate unchanged in the 4.25%-4.50% range at its July policy meeting. Fed officials said they remain cautious about the impact tariffs will have on inflation and believe the US economy is in the right position now that they can wait to see the impacts before making the next move. The cautious stance of the Fed could underpin the Greenback against the Loonie in the near term.
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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