USD/CAD bounces up from lows but remains on the defensive below 1.3700
- The Canadian Dollar loses ground with Oil prices coming down from highs.
- -The US Dollar remains on the defensive as US data boosts hopes of Fed easing.
- Today's focus is on the US PPI to confirm the CPI’s moderate inflation trend.
The US Dollar is posting a mild recovery against its Canadian counterpart on Thursday’s European trading session. The pair bounced up from one-week lows, with the CAD losing ground as Oil prices ease, but maintains its broader bearish trend intact, with bulls capped well below the 1.3700 level so far.
The Canadian Dollar’s rally lost steam on Thursday, with Oil prices retreating from two-month highs. The US Benchmark WTI Oil appreciated 5% rally on Wednesday, as the frictions between the US and Iran threatened to disrupt crude supply from the already volatile region, which acted as a tailwind for the Loonie.
Fed cut hopes are weighing on the USD
The pair had dropped to levels close to the 20-month low at 1.3634 hit earlier this month, weighed by the skeptical market reaction to the US-China trade deal and soft US CPI figures, which boosted hopes that the Federal Reserve will cut rates again in September.
sighed
Markets sighed with relief on Wednesday after US CPI data revealed that consumer inflation grew at a slower-than-expected pace in April, despite the tariff turmoil. Monthly inflation accelerated 0.1% with the yearly rate growing at a 2.4% pace, below market expectations of 0.2% and 2.5% readings, respectively.
Investors will be attentive to the US PPI release to confirm the moderate inflation trends, but, so far, hopes of Fed easing in September have increased, with futures markets pricing a nearly 60% chance of a 25 bps cut, from about 50% last week.
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.