USD/CAD holds steady above 1.3700, bulls turn cautious ahead of US consumer inflation

• USD/CAD moves back closer to its highest level since August 16 amid a bullish USD. 
• Bets for a regular 25 bps Fed rate cut in November lift the USD to a multi-week top.
• An uptick in Oil prices underpins the Loonie and caps the pair ahead of the US CPI.

The USD/CAD pair reverses an Asian session dip and is currently placed just above the 1.3700 round figure, within the striking distance of its highest level since August 16 touched the previous day. The intraday uptick, however, lacks bullish conviction amid recovering Crude Oil prices, which tend to underpin the commodity-linked Loonie, and ahead of the latest US consumer inflation figures.

Investors remained wary of a potential escalation in tensions between Israel and Iran, with Israeli Defence Minister Yoav Gallant promising that the strike against the latter would be "lethal, precise and surprising". This raises worries about supply disruptions from the Middle East, which, along with a spike in fuel demand on the back of a major storm in Florida, assists Crude Oil prices to build on the overnight bounce from a one-week low. This, in turn, offers some support to the Canadian Dollar (CAD), though expectations for a larger interest rate cut by the Bank of Canada (BoC) cap gains. Apart from this, the underlying bullish tone surrounding the US Dollar (USD) acts as a tailwind for the USD/CAD pair. 

The USD Index (DXY), which tracks the Greenback against a basket of currencies, touched a fresh eight-week high in the last hour as traders fully price out the possibility of another interest rate cut by the Federal Reserve (Fed) in November. The recent US macro data pointed to a still resilient labor market and forced investors to scale back their expectations for a more aggressive policy easing by the Fed. Adding to this, the September FOMC meeting minutes released on Wednesday showed a consensus that the outsized rate cut would not lock the central bank into any specific pace for future cuts. This keeps the US Treasury bond yields and the USD elevated, assisting the USD/CAD pair to attract some dip-buyers. 

Traders, however, seem reluctant and prefer to wait for more cues about the Fed's rate-cut path before placing fresh USD bullish bets. Hence, the focus will remain glued to the release of the crucial US Consumer Price Index (CPI) later today, which will be followed by the US Producer Price Index (PPI) on Friday. Apart from this, the Canadian monthly employment details on Friday will be looked upon to determine the near-term trajectory for the USD/CAD pair.

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.

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