USD/CAD softens below 1.3500, with all eyes on US PCE data
- USD/CAD weakens to around 1.3470 in Friday’s early Asian session.
- The US August PCE data will be in the spotlight on Friday.
- The softer US Dollar weighs on the pair, but lower crude oil prices might cap its downside.
The USD/CAD pair edges lower to near 1.3470 during the early Asian session on Friday, pressured by the weaker US Dollar (USD) broadly. Investors await bigger clues about the economy's health after upbeat US economic data on Thursday. The US Personal Consumption Expenditures (PCE) Price Index for August will take center stage on Friday.
With its larger-than-normal reduction last week, the Federal Reserve (Fed) sent a clear message that interest rates are heading considerably lower in the future. This, in turn, exerts some selling pressure on Greenback against the Canadian Dollar (CAD).
Fed Officials penciled in another 50 basis points (bps) rate cuts by the end of the year and another 100 bps reductions by the end of 2025. Nonetheless, the release of US PCE data, the Fed’s preferred price metric, could give them hints about the US central bank’s path ahead. The headline PCE is expected to show an increase of 2.3% YoY in August, while the core PCE is projected to show a rise of 2.7% YoY in the same report. In the case of the hotter-than-expected inflation data, this could help limit the USD’s losses.
On the Loonie front, Bank of Canada (BoC) Governor Tiff Macklem said on Tuesday that it is reasonable to expect more rate cuts as the BoC has made progress in bringing inflation back down to the 2% target. Meanwhile, the fall in crude oil prices could weigh on commodity-linked CAD as Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
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.