The USD/CAD pair has been trading in positive territory for eight consecutive days, hovering around 1.3745 in the early Asian session on Friday. This rally is supported by the hotter-than-expected US inflation data and hawkish comments from Federal Reserve (Fed) officials. The US Consumer Price Index (CPI) for September came in at 2.4% year-on-year, above the forecast of 2.3%. Additionally, the core CPI, excluding food and energy, rose to 3.3% year-on-year, surpassing expectations. On the other hand, the US Initial Jobless Claims for the week ending October 4 unexpectedly increased to 258K, up from the previous week’s 225K, indicating some weakness in the job market. Despite the strong inflation reading, futures markets are pricing in a 86% chance of a 25 basis points rate cut by the Fed in the November meeting.
On the Canadian front, the Unemployment Rate is anticipated to rise from 6.6% in August to 6.7% in September. This, coupled with easing inflation, may prompt the Bank of Canada (BoC) to implement a faster and more substantial interest rate cut. This possible rate cut could put downward pressure on the Canadian Dollar (CAD) and act as a catalyst for the USD/CAD pair to move higher. The Canadian job report, to be released later on Friday, will provide further insight into the economic conditions in Canada and may influence the direction of the CAD in the near term.
The key drivers of the Canadian Dollar (CAD) include factors such as interest rates set by the BoC, the price of Oil, the health of the Canadian economy, inflation, and the Trade Balance. Market sentiment, particularly investors’ appetite for risk, also plays a significant role in determining the strength of the CAD. Additionally, economic indicators from the US, Canada’s largest trading partner, can impact the value of the Canadian Dollar.
The Bank of Canada (BoC) plays a crucial role in shaping the value of the Canadian Dollar by adjusting interest rates to maintain inflation within the target range of 1-3%. Higher interest rates tend to be positive for the CAD, while quantitative easing or tightening can influence credit conditions in the economy. The price of Oil is another key factor that directly impacts the CAD value, as Canada’s economy heavily relies on Oil exports. Moreover, higher Oil prices usually lead to a positive Trade Balance, supporting the strength of the CAD.
Contrary to traditional beliefs, higher inflation can actually be beneficial for a currency in the modern era of global capital flows. Central banks tend to raise interest rates in response to higher inflation, attracting more capital inflows and increasing demand for the local currency. As a result, higher inflation rates can lead to a stronger currency, as seen in the case of the Canadian Dollar. Macroeconomic data releases, such as GDP, PMIs, employment figures, and consumer sentiment surveys, serve as indicators of the Canadian economy’s health and can influence the movement of the CAD. A strong economy is generally favorable for the Canadian Dollar, attracting foreign investment and potentially leading to interest rate hikes by the BoC. On the other hand, weak economic data may cause the CAD to depreciate.
