USD/CAD hovers around three-month highs near 1.3950, awaits US PCE inflation, Canada GDP

• USD/CAD maintains its position around a three-month high at 1.3940, marked on Wednesday.
• US GDP annualized expanded by 2.8% in Q3, below 3.0% in Q2 and forecasts of 3.0%.
• Traders will closely observe US PCE - Price Index and Canada’s Gross Domestic Product data on Thursday.

USD/CAD appreciates to near its three-month high of 1.3940, recorded in the previous session, trading around 1.3920 during Thursday's European session. This upside of the pair could be linked to the solid US Dollar (USD) as market caution lingers amid uncertainty surrounding the upcoming US presidential election.

Traders are now focusing on upcoming key US data releases including PCE inflation data on Thursday and Nonfarm Payrolls (NFP) on Friday. On Wednesday, the Greenback encountered headwinds as the US Gross Domestic Product (GDP) annualized expanded by 2.8% in Q3, below 3.0% in Q2 and forecasts of 3.0%.

However, the ADP Employment Change report showed that private businesses in the United States added 233,000 workers in October, marking the largest increase since July 2023. This followed an upward revision to 159,000 in September and significantly exceeded forecasts of 115,000.

The commodity-linked Canadian Dollar (CAD) might have received support from stronger Oil prices, as Canada remains the largest crude supplier to the United States (US). crude prices found support amid optimism surrounding US fuel demand after an unexpected decline in crude inventories. West Texas Intermediate (WTI) Oil price trades around $68.70 at the time of writing.

The US Energy Information Administration (EIA) reported that crude Oil stockpiles fell by 0.515 million barrels in the week ending October 25, contrary to market expectations of a 2.3 million-barrel increase.

Bank of Canada Governor Tiff Macklem addressed the House of Commons Finance Committee on Wednesday to discuss the bank's monetary policy. Macklem stated that if the economy aligns broadly with their forecast, they expect to cut the policy rate further to support demand and maintain inflation on target.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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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