Canadian Dollar strengthens after hot PPI figures
- USD/CAD dips as traders digest Fed minutes, signaling cautious stance on rate cuts.
- Trump’s new tariffs on Canadian lumber add fresh trade uncertainty.
- Markets eye Canadian Retail Sales, BoC Governor Macklem’s speech for further cues.
The Canadian Dollar appreciated against the Greenback on Thursday. The USD/CAD dropped below the 1.4200 figure, and the Greenback got battered due to investors digesting the latest Federal Open Market Committee (FOMC) minutes.
Canada’s economic docket revealed that Producer Prices exceeded market estimates and December’s figures in January. Other data showed that housing prices were mixed monthly and yearly.
Regarding tariffs, US President Donald Trump announced plans to enact tariffs on lumber and forest products next month. This is significant for Canada, one of the world's leading producers and exporters.
In the meantime, the Fed’s latest minutes showed that officials are concerned about Trump’s administration's trade and immigration policies. Policymakers noted that some inflation expectations had risen recently, adding that maintaining policy firm is appropriate.
Traders would be eyeing the release of Canadian Retail Sales on Friday and Bank of Canada (BoC) Governor Tiff Macklem's speech. At the same time, S&P Global Flash PMIs will update the status of business activity in the US.
Daily digest market movers: Canadian Dollar rallie amid mixed US data
- Canada’s Producer Price Index (PPI) rose 1.6% MoM in January, above forecasts of 0.8%. In the twelve months to January, the PPI increased 5.8%, up from 4.1%.
- US Initial Jobless Claims for the week ending February 15 increased by 219K, exceeding forecasts of 215K.
- Interest rate differentials between Canada and the United States are putting a lid on the Loonie’s gains.
- Elevated inflation reports in Canada could prevent the BoC from lowering rates in check following the release of January’s CPI data. In that outcome, the USD/CAD could aim lower as the Canadian Dollar appreciates versus the Greenback.
USD/CAD price forecast: Canadian Dollar gathers traction and appreciates on soft US Dollar
The USD/CAD uptrend has lost steam after the pair peaked near 1.4800. Since then, sellers have taken over, pushing prices below the 50-day Simple Moving Average (SMA) at 1.4338 and clearing the January 20 daily low of 1.4260, a crucial level for buyers. Further downside lies ahead if bears push spot prices below the 100-day SMA at 1.4111.
Otherwise, if buyers lift USD/CAD past 1.4300, they must reclaim the 50-day SMA to remain hopeful of higher prices.
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.