USD/CAD returns above 1.3900 amid strong US data, lower Oil prices

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The USD/CAD is trading higher on Thursday, buoyed by strong US data and a softer Canadian Dollar, weighed by the recent pullback in Oil prices.

USD/CAD returns above 1.3900, approaching monthly highs, near 1.3920.
US PPI and Retail Sales data have given a fresh boost to the Greenback.
The Canadian Dollar is struggling as Oil prices retreat from recent highs.

The USD/CAD is trading higher on Thursday, buoyed by strong US data and a softer Canadian Dollar, weighed by the recent pullback in Oil prices. The pair appreciated beyond 0.2% on the day so far, extending its rebound from weekly lows at 1.3850, beyond 1.3900, and drawing closer to the monthly highs at the 1.3920 area.

US data released on Wednesday provided additional support to the Greenback. Producer prices growth accelerated to 3% year-on-year, from 2.8% in the previous month, against expectations of a slowdown to 2.7%. In the same line, the core PPI accelerated to 3% in the year to November, from 2.9%, also against the market consensus of a 2.7% reading.

At the same time, Retail Sales data from the Census Bureau revealed that consumption bounced back 0.6% in November, following a 0.1% decline in October, beating market expectations of a 0.4% increase.

These figures offset the moderate US Consumer Price Index (CPI) data witnessed on Wednesday and cement the idea that the Federal Reserve’s (Fed) monetary policy will remain unchanged in the near-term.

Furthermore, US President Donald Trump said that he has information showing that repression against protesters in Iran is abating, which lessens the chances of an immediate military intervention in the country. This news has sent oil prices nearly 2% down on the day so far, which adds significant weight on the commodity-sensitive Canadian Dollar.

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.