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11 Dec 2024
USD/CAD extends upside above 1.4150, all eyes on US CPI data, BoC rate decision
- USD/CAD edges higher to around 1.4180 in Wednesday’s early Asian session.
- The US CPI data will be closely monitored on Wednesday.
- The BoC is anticipated to deliver a 50 bps reduction on Wednesday, bringing the benchmark rate to 3.25%.
The USD/CAD pair extends the rally to near 1.4180 during the early Asian session on Wednesday, bolstered by the firmer US dollar (USD) broadly. The release of crucial US November Consumer Price Index (CPI) data and the Bank of Canada (BoC) interest rate decision will be in the spotlight later on Wednesday.
The headline US CPI inflation is expected to rise to 2.7% YoY in November from 2.6% in October. The core CPI is estimated to show an increase of 3.3% YoY during the same period. The reading will be the last major inflation data point before the Federal Reserve's (Fed) final policy meeting of the year.
Any signs that progress has stalled could well undercut the chances of a rate cut, lifting the Greenback. The markets are now pricing in nearly an 80% chance of a quarter-point Fed reduction in the December meeting, according to the CME FedWatch tool.
On the Loonie front, the BoC is widely expected to lower its benchmark interest rate by 50 basis points (bps), currently sitting at 3.75%, in a fifth consecutive decision on Wednesday. Money markets raised bets of an oversized step to 80% after Friday’s November employment report showed a larger-than-expected jump in the unemployment rate to 6.8% in November. Nathan Janzen, assistant chief economist at RBC, emphasized a divergence in the policy rates between the BoC and Fed as the prevailing headwind for the Canadian Dollar (CAD).
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.