USD/CAD clings to gains near 1.4100 as Canadian inflation data takes center stage
- USD/CAD stays firm near 1.4100 as the US Dollar performs strongly across the board.
- Fed Powell doesn’t see any urgency for lowering interest rates aggressively.
- Traders await Canadian inflation data for fresh BoC interest rate cues.
The USD/CAD pair holds into gains near a fresh more than four-year high around 1.4100 in Monday’s European session. The Loonie pair strives to maintain its winning spell for the seventh trading day on Monday on multiple tailwinds: strength in the US Dollar (USD) across the board on likely acceleration in the United States (US) inflation due to President-elected Donald Trump’s victory in both houses and weakness in the Canadian Dollar (CAD) on increasing Bank of Canada (BoC) dovish bets.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near a fresh yearly high of 107.00. Market sentiment is slightly cautious as investors expect the Federal Reserve (Fed) to follow a more gradual policy-easing approach. S&P 500 futures trade cautiously during European trading hours.
On Thursday, Fed Chair Jerome Powell pushed back expectations of aggressive interest rate cuts but affirmed that the policy-easing cycle is intact, with inflation remaining on a sustainable track toward the bank’s target of 2%.
"The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said and added, “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully."
Meanwhile, the CAD remains on the backfoot as trades expect the BoC to cut interest rates again by 50 basis points (bps) in the December meeting. For more interest rate cues, investors await the Canadian Consumer Price Index (CPI) data for October, which will be published on Tuesday. Statistics Canada is expected to show that month-on-month headline CPI rose by 0.3% after a 0.4% deflation in September. On year, the inflation data is expected to have grown by 1.9%, faster than the former reading of 1.6%.
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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