USD/CAD bounces up to 1.3780 amid a moderate US Dollar recovery
- The Canadian Dollar pares gains as the US Dollar bounces up ahead of US PPI data.
- Investors are wary of above-expectations producer price figures, which might cool hopes of Fed easing.
- The extended decline in Crude prices keeps CAD’s upside attempts limited.
The Canadian Dollar is trading lower against its US peer on Thursday. The US Dollar has shrugged off investors’ hopes of Fed easing and Treasury Secretary Bessent’s pressure on the US Central bank and is featuring a moderate recovery ahead of the US PPI data release.
The USD/CAD pair has bounced up from lows at 1.3745 to reach session highs right above 1.37800 on Thursday’s European morning session. The pair, however, remains trapped within the tight weekly range, with 1.38000 limiting upside attempts
US PPI data might provide some support to the USDollar later today
Moderate US inflation data seen earlier this week boosted hopes of Fed cuts and sent the USDollar lower across the board, but investors are trimming USD short bets on Thursday, bracing for hotter producer prices data.
US PPI is expected to have accelerated at a 0.2% pace in July, following a flat reading in June, and to 2.5% on the year, from 2.3% in June. Likewise, the core PPI is seen picking up to 0.2% from 0% on the month and to 2.9% year-on-year, after a 2.6% reading in June. These figures might cool hopes of immediate monetary policy easing.
In Canada, in the absence of key macroeconomic data, the lower oil prices –WTI Oil is trading at 2-month lows near $62.00– keep the Canadian Dollar on its back foot. Hopes of a peace deal in Ukraine and the OPEC+ decision to hike output further in September are acting as headwinds for Oil price recovery.
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.