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13 Aug 2024
USD/CAD declines toward 1.3700 on soft US producer inflation report
- USD/CAD sees more downside towards 1.3700 on multiple headwinds.
- Soft US PPI report for July has weighed on the US Dollar.
- Upbeat Oil prices have improved the Canadian Dollar’s appeal.
The USD/CAD pair appears vulnerable near 1.3730 in Tuesday’s New York session. The Loonie asset is expected to decline towards the round-level support of 1.3700 as the United States (US) Bureau of Labor Statistics (BLS) has released a soft Producer Price Index (PPI) report for July, which has weighed on the US Dollar (USD).
The report showed that headline producer inflation grew at a slower pace of 2.2% from the estimates of 2.3% and the prior release of 2.7%. Also, the core PPI, which excludes volatile food and energy prices, decelerated at a faster-than-expected pace to 2.4% from expectations of 2.7% and the former reading of 3%. This has boosted expectations that the Federal Reserve (Fed) will pivot to policy-normalization aggressively.
Soft US producer inflation data has improved investors’ risk-appetite. The S&P 500 has opened with strong gains. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls to near 103.00. 10-year US Treasury yields have tumbled to near 3.86%.
This week, the major trigger for the US Dollar will be the US Consumer Price Index (CPI) for July, which will be published on Wednesday.
The US CPI report is expected to show that the headline and core inflation rose by 0.2% on month-on-month basis. Annually, the headline and the core CPI are expected to have decelerated by one-tenth to 2.9% and 3.2%, respectively, from levels seen in June.
On the Loonie front, upbeat Oil prices have strengthened the Canadian Dollar’s (CAD) appeal. The Oil price has rallied more than 9% in the past one week amid supply concerns due to deepening Middle East tensions. Market participants worry about a full-fledged attack from Iran on Israel in retaliation for the assassination of the Hamas leader by an Israeli air strike in Tehran. It is worth noting that Canada is the leading exporter of Oil to the US and higher Oil prices prompt foreign flows in the economy.
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.