- USD/CAD trades with mild gains around 1.4215 in Friday’s early Asian session.
- US annual PPI inflation rose to 3.0% YoY in November vs. 2.6% expected.
- Trump tariff threats could undermine the Loonie, but higher crude oil prices might help limit its losses.
The USD/CAD pair posts modest gains to near 1.4215 during the early Asian session on Friday. The uptick of the pair is bolstered by the firmer US Dollar (USD) broadly after the hotter-than-expected US Producer Price Index (PPI) inflation report.
Data released by the US Bureau of Labor Statistics on Thursday showed that the PPI for final demand in the US rose 3.0% YoY in November. This reading followed the 2.6% increase seen in October and came in above the market consensus of 2.6%. Meanwhile, the annual core PPI climbed 3.4% YoY in the same period, beating the estimated 3.2%. On a monthly basis, the PPI and the core PPI increased 0.4% and 0.2%, respectively. The Greenback gains traction in an immediate reaction to the PPI inflation data.
Despite the stubborn inflation in the US, markets widely expect the Federal Reserve (Fed) to lower its key overnight borrowing rate next week. According to the CME FedWatch Tool, Fed funds futures trading data reflects a nearly 95% likelihood that the US central bank will cut the rates by a quarter point.
On the other hand, analysts from TD Economics said that both the US and Canadian economies will navigate through policy uncertainties. Analysts added that even a 10% blanket tariff on Canada would likely cause extended economic stagnation over 2 years. The concerns about Trump tariff threats might exert some selling pressure on the Canadian Dollar (CAD) and create a tailwind for the pair. Meanwhile, the recovery in crude oil prices could help limit the CAD’s losses as Canada is the largest oil exporter to the US.
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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