- USD/CAD recovers from 1.3600 as an expected decline in Canada’s inflation data boosts BoC’s more rate cut hopes.
- Canada’s annual headline CPI decelerates to 2.5% as expected.
- Investors await Fed Powell’s speech at the Jackson Hole Symposium.
The USD/CAD pair rebounds sharply from the round-level support of 1.3600 in Tuesday’s New York session after the release of Canada’s Consumer Price Index (CPI) data for July.
The Canadian CPI report showed that the annual headline inflation decelerated to 2.5%, as expected, from 2.7% in June. In the same period, the Bank of Canada’s (BoC) core CPI, which excludes the eight most volatile components, grew at a slower pace of 1.7% from the prior release of 1.9%.
However, monthly headline inflation grew strongly by 0.4% after deflating in June. Economists estimated the headline CPI to have grown by 0.3%.
Consistently easing price pressures have prompted expectations of more interest rate cuts by the BoC. The BoC has already reduced its key borrowing rates by 50 basis points (bps) to 4.5% since its July policy meeting.
Meanwhile, the commodity-linked Canadian Dollar (CAD) is also expected to face pressure due to weak Oil prices. Rising expectations of a ceasefire between Iran and Israel have resulted in diminishing Oil supply worries, prompting weakness in its prices. It is worth noting that Canada is the largest exporter of Oil to the United States (US) and lower Oil prices result in a decline in foreign inflows to the former.
In the neighboring nation, investors await the Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole Symposium on August 22-24. Fed Powell is expected to provide cues on how much the central bank will cut interest rates this year. This will have a significant impact on the US Dollar (USD).
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to a more-than-seven-month low near 101.70.
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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