USD/CAD advances to over one-week high, holds above 1.3700 as traders look to US PCE data (2024)

  • USD/CAD attracts fresh buyers on Friday amid a goodish pickup in the USD demand.
  • The Fed’s hawkish outlook acts as a tailwind for the US bond yields and the Greenback.
  • Bullish Crude Oil prices underpin the Loonie and cap gains ahead of the US PCE data.

The USD/CAD pair catches fresh bids following the previous day's good two-way price moves and spikes to a one-and-half-week high during the Asian session on Friday. Spot prices, however, retreat a few pips in the last hour and currently trade around the 1.3715 region, up just over 0.10% for the day.

As investors look past Thursday's softer US macro releases, the US Dollar (USD) regains positive traction and climbs to a fresh two-month peak, which turns out to be a key factor that provides a goodish lift to the USD/CAD pair. The intraday USD uptick could be attributed to some repositioning trade ahead of the crucial US inflation data, though lacks follow-through amid the uncertainty about the Federal Reserve's (Fed) rate cut path. Hence, the focus will remain on the US Personal Consumption Expenditure (PCE) Price Index, due later this Friday.

A lower-than-expected PCE deflator or a number that is in line with market expectations will back the case for two rate cuts by the Fed this year, which, in turn, could weaken the USD. Meanwhile, any upward surprise should push back the expected timing for the first Fed cut and trigger a fresh leg up for the buck. Nevertheless, the data will play a key role in influencing expectations about the Fed's future policy decisions, which, in turn, will drive the USD demand in the near term and help in determining the next leg of a directional move for the USD/CAD pair.

Heading into the key data risk, growing acceptance that the Fed will start lowering borrowing costs in September amid signs of easing inflationary pressures and moderating US economic growth momentum caps the USD. The Canadian Dollar (CAD), on the other hand, draws support from a surge in domestic consumer inflation, which tempered bets for a July rate cut by the Bank of Canada (BoC). This, along with a further rise in Crude Oil prices to a fresh two-month top, underpins the commodity-linked Loonie and contributes to capping the USD/CAD pair.

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.

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USD/CAD advances to over one-week high, holds above 1.3700 as traders look to US PCE data (2024)
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