USD/CAD extends upside to near 1.3950, US CPI data in focus
- USD/CAD trades in positive territory for the fourth consecutive day near 1.3950 in Wednesday’s early Asian session.
- Fed's Kashkari said it was premature to declare victory over inflation.
- Lower crude oil prices weigh on the commodity-linked CAD.
The USD/CAD pair extends the rally to around 1.3950 during the early Asian session on Wednesday. The upward movement of the pair is bolstered by the firmer US Dollar (USD) amid optimism around the Trump trades. Investors will closely monitor the release of the US October Consumer Price Index (CPI) data, which is due later on Wednesday.
The expectation that Trump’s policies could trigger a fresh wave of inflation and compel the US Federal Reserve (Fed) to slow the pace of rate reductions boost the USD broadly. Meanwhile, the US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, climbs past the 106.00 barrier, the highest level in six months.
On Tuesday, Minneapolis Fed President Neel Kashkari said that the central bank feels confident about its long-running battle with transitory inflation, but it’s premature to declare outright victory. Kashkari added that the Fed won't model Trump policies' effect on the economy until they become clear. Richmond Fed President Tom Barkin noted that while inflation appears to be coming down, it might still get stuck above the Fed's target levels.
The key US CPI inflation figures on Wednesday will be in the spotlight as they might give clarity about future US policy. The headline CPI inflation is expected to rise slightly to 2.6% YoY in October from 2.4% in September, while the core CPI is projected to show an increase of 3.3% YoY in the same report period.
On the Loonie front, the fall in crude oil prices continues to undermine the commodity-linked Canadian Dollar (CAD). It's worth noting that 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.