USD/CAD maintains position near 1.3950 ahead of US PCE inflation data

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USD/CAD hovers near the four-month high of 1.3949, reached on Thursday.
The US Dollar receives support as strong economic data may slow the Fed’s interest rate cuts.
Canada has finalized its first Indo-Pacific trade deal under Prime Minister Mark Carney, aiming to reduce reliance on the US.

USD/CAD remains stronger for the fifth consecutive day, trading around 1.3940 during the Asian hours on Friday. The pair holds ground near the four-month high of 1.3949, which was recorded on Thursday, after the stronger-than-expected economic data from the United States (US). Focus shifts toward Personal Consumption Expenditures (PCE) Price Index data, the Federal Reserve’s preferred inflation gauge, due later on Friday.

Robust economic data may prompt the US Federal Reserve (Fed) to adopt a more cautious approach to cutting interest rates. The US Gross Domestic Product (GDP) Annualized grew 3.8% in the second quarter (Q2), coming in above the previous estimate and the estimation of 3.3%. Meanwhile, the GDP Price Index rose 2.1% in the same period, as compared to the expected and previous 2.0% growth. US Initial Jobless Claims declined to 218K last week, the lowest since July. The market expectations were an increase to 235K from 232K previously.

Fed Bank of Kansas City President Jeffrey Schmid said on Thursday that the Fed is currently close to meeting its mandates, but added that policy must be forward-looking. Schmid added that the rate cut was appropriate to offset risks to the labor market, though inflation is still too high and the current job market is largely in balance, per Reuters. However, Chicago Fed President Austan Goolsbee noted that he was not eager to do a lot more policy easing while inflation is above target and moving the wrong way.

Canadian Trade Minister Maninder Sidhu said on Thursday that Canada has signed its first Indo-Pacific trade deal under Prime Minister Mark Carney, as part of efforts to reduce reliance on the United States (US). “I see a lot of opportunities in agriculture, in energy and telecom, in defense and aerospace,” Sidhu added.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.