The Canadian Dollar struggled on Tuesday despite gaining ground against the US Dollar, with market focus shifted to inflation figures. While Canada remained quiet on the economic calendar, traders eagerly awaited the upcoming US Consumer Price Index (CPI) inflation print. With US Producer Price Index (PPI) inflation cooling in July, expectations rose for a potential double rate cut from the Federal Reserve (Fed) in September.
As the US PPI inflation dipped to 2.2% year-over-year in July, below expectations and down from the previous period, the USD weakened against major currencies. The upcoming US CPI inflation print is predicted to align with decreasing inflation pressures, prompting markets to anticipate a double cut of 50 basis points in September from the Fed. Despite lower odds compared to the previous week, rate markets continue to monitor the situation closely.
USD/CAD dropped below 1.3730 on Tuesday, falling further from the 1.3750 level as the Greenback faced increasing pressure. The pair retreated to three-week highs against the US Dollar, showcasing limited topside momentum. While long-term technicals suggest favorable positions north of the 200-day EMA at 1.3630, recent movements have failed to break past the 1.3950 peak from the prior week.
The Canadian Dollar’s value is influenced by various factors including interest rates set by the Bank of Canada, the price of Oil, Canada’s economic health, inflation, and the Trade Balance. Additionally, market sentiment, particularly with regard to risk-on vs. risk-off assets, plays a role in driving the CAD. The US economy, as Canada’s largest trading partner, also impacts the Canadian Dollar.
The Bank of Canada plays a crucial role in determining the Canadian Dollar’s value through interest rate adjustments to maintain inflation within the 1-3% range. Higher interest rates are generally positive for the CAD, while quantitative easing and tightening have contrasting effects. Oil prices directly impact the Canadian Dollar due to Canada’s heavy reliance on Oil exports. Higher Oil prices often lead to a stronger CAD.
Inflation, once seen as a negative influence on currency value, can now attract capital inflows from global investors seeking profitable opportunities. Higher inflation may prompt central banks to raise interest rates, driving up demand for the local currency. Macro-economic data releases, such as GDP, PMIs, employment figures, and consumer sentiment surveys, provide insight into the Canadian economy’s health and impact the CAD’s direction. A strong economy typically attracts foreign investment and may lead to interest rate hikes, strengthening the Canadian Dollar.
