• USD/CAD remains steady as strong US CPI data boosts December Fed rate hike expectations.
• Hot US CPI data has reinforced expectations of a December Fed rate hike.
• The commodity-linked Canadian Dollar may struggle as oil prices decline amid growing US crude oil inventory.

USD/CAD moves little after two days of gains, trading around 1.4250 during Asian hours on Friday. However, the pair may appreciate as the US Dollar (USD) could receive support from persistent inflation concerns and expectations of higher interest rates. Traders will take more cues from the US October Producer Price Index (PPI) report later on Friday.

Stronger-than-expected US Consumer Price Index (CPI) inflation data released earlier this week has reinforced expectations of a Fed rate hike in December. Fed Governor Christopher Waller said that a 50-basis-point rate hike should be considered if core inflation remains elevated.

Markets now see a 14.5% chance of a 50-basis-point hike, up from zero before Tuesday’s inflation report. Attention will shift to Friday’s US PPI report for further clues on inflation and the US central bank’s decision on interest rates. The headline PPI is expected to show a rise of 6.6% YoY in October, while the core PPI is projected to show an increase of 5.0% YoY during the same report period.

Moreover, the USD/CAD pair also may gain ground as the commodity-linked Canadian Dollar (CAD) could face challenges on lower oil prices. West Texas Intermediate (WTI) oil price loses momentum amid growing US crude oil inventory.

US crude oil inventories rose sharply last week, fueling worries about oversupply. According to the Energy Information Administration (EIA), crude stockpiles climbed by 9 million barrels in the week ending November 5, compared to a fall of 5.267 million barrels in the previous week. The market consensus was for a decline of 1 million barrels.

USD strength seen as Canadian Dollar and Korean Won come under pressure

According to TD Securities, the US Dollar still has scope to outperform selectively, with analysts noting that “across global major currencies, we see room for the USD to rally selectively against CAD and KRW in the near-term.” They argue that “diverging employment data releases will likely keep USDCAD supported above 1.40,” as a “rising unemployment rate amid falling wage growth rate in Canada also reduces the market pricing of a December BoC rate hike relative to the Fed.”

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.

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.