USD/CAD treads water below 1.3800, awaiting US inflation figures

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The US Dollar bounced from three-month lows around 1.3730 against its Canadian Counterpart earlier this week, but has failed to find acceptance above the 1.3800 line.

USD/CAD stalls below 1.3800 after bouncing up from 1.3730.
Investors are wary of placing large US Dollar bets ahead of the US CPI release.
Steady Canadian inflation data and lower Crude prices are acting as headwinds for the Loonie.

The US Dollar bounced from three-month lows around 1.3730 against its Canadian Counterpart earlier this week, but has failed to find acceptance above the 1.3800 line. This has left the pair hovering in no man's land, around 1.3780, as traders await US inflation figures before taking investment decisions.

The US Consumer Price Index is expected to have accelerated to a 3.1% year-on-year rate in November, from 3.0% in September, the last data available, as the US Government shutdown discontinued the collection of data for October’s release. The Core CPI is expected to have remained steady at 3%.

Investors will be particularly attentive to November’s inflation data, following a backlog of delayed US Nonfarm Payrolls statistics, which pointed to a stalling labour market, higher unemployment levels, and moderating wage inflation. In this context, soft inflation figures would feed hopes of near-term rate cuts and add bearish pressure on the US Dollar.

The Canadian Dollar trimmed some gains earlier this week, after Canada’s consumer prices revealed that inflation remained broadly steady in November, easing pressure on the Bank of Canada to start tightening its monetary policy any time soon.

Beyond that, Oil prices, Canada’s main export, are pulling lower, giving away some of Wednesday’s recovery. The US benchmark WTI has lost about $1 so far on Thursday, falling below the $56.00 level, and drawing closer to a nearly five-year low of $54.79 reached in April, adding pressure on the commodity-sensitive CAD.

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.