- USD/CAD trades with mild negative bias near 1.3955 in Wednesday’s early Asian session.
- The geopolitical risks might boost the safe-have currency like the USD.
- Canada's CPI inflation jumps to 2.0% in October from 1.6% in September.
The USD/CAD pair trades with mild losses around 1.3955 during the early Asian session on Wednesday. The hotter-than-expected Canadian inflation report for October supports the Canadian Dollar (CAD) against the Greenback. However, the renewed geopolitical tensions between Russia and Ukraine might cap the pair’s downside.
Reuters reported late Tuesday that Ukraine used US ATACMS to strike Russian territory for the first time, marking a significant uptick in hostilities on the 1,000th day of the conflict. The immediate reaction in markets faded when Russian Foreign Minister Sergei Lavrov said that the government would "do everything possible" to avoid the onset of nuclear war. The US said that it had not adjusted its nuclear posture in response. Investors will closely monitor the developments surrounding the geopolitical risks. Any signs of escalation could boost the safe-haven flows, benefiting the Greenback.
On the Loonie front, traders trim their bets on a jumbo rate cut by the Bank of Canada (BoC) in December after Canada's annual inflation rate rose more than expected in October. Data released by Statistics Canada on Tuesday showed that the country’s Consumer Price Index (CPI) rose by 2.0% YoY in October, compared to a 1.6% gain in September, hotter than the market expectations of a 1.9% increase. On a monthly basis, the CPI increased by 0.4% versus -0.4% prior and above the market consensus of 0.3%.
The markets are now pricing in nearly 26% odds of a 50 basis point (bps) rate cut by the BoC next month, down from 37% before the CPI data release. Traders will take more cues from the Canadian Gross Domestic Product (GDP) data next week and employment data early next month, which might influence the BoC’s decision on the size of the rate reduction.
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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