- USD/CAD softens to around 1.3955 in Friday’s early Asian session.
- US economic data support Fed rate cut bets.
- Lower crude oil prices might weigh on the Loonie and cap the upside for the pair.
The USD/CAD pair loses ground to near 1.3955 during the early Asian session on Friday. The Greenback weakens against the Canadian Dollar (CAD) as US economic data fueled speculation that the Federal Reserve (Fed) will resume interest rate cuts in the coming months.
Another soft inflation print suggested that companies are absorbing some of the hit from higher tariffs. Data released by the Bureau of Labor Statistics on Thursday showed that the US Producer Price Index (PPI) rose 2.4% YoY in April, following the 2.7% increase in March. This figure came in below the market expectation of 2.5%.
Meanwhile, the annual core PPI rose 3.1% in April versus 4% prior. On a monthly basis, the PPI and the core PPI declined 0.5% and 0.4%, respectively. Swaps trader increased their bets on further Fed rate cuts this year, which undermines the US Dollar (USD) broadly.
The US Initial Jobless Claims for the week ending May 10 came in at 229K, compared to the previous week's revised tally of 229K (revised from 228K), according to the US Department of Labor (DOL) on Thursday. This reading matched initial estimates. Additionally, Continuing Jobless Claims went up by 9K to reach 1.881M for the week ending May 3.
A decline in Crude Oil prices might cap the upside for the commodity-linked Loonie and create a tailwind for the pair. It’s worth noting that Canada is the largest oil exporter to the 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.
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