• USD/CAD gains ground to around 1.4195 in Tuesday’s late American session. 
  • Canada's annual CPI inflation rate rose to 1.9% in January.
  • Fed’s Daly said the policy should stay restrictive until more inflation progresses.

The USD/CAD pair trades on a positive note around 1.4195 during the late American session on Tuesday. The hawkish remarks from Federal Reserve (Fed) officials underpin the US Dollar (USD). Investors brace for the FOMC Minutes, which will be released on Wednesday. 

Data released by Statistics Canada on Tuesday showed that Canada’s Consumer Price Index (CPI) rose by 1.9% YoY in January, compared to 1.8% in December, matching analysts’ expectations. On a monthly basis, the CPI rose 0.1% versus -0.4% prior. Meanwhile, the Bank of Canada’s Core CPI inflation, which strips out volatile categories like food and energy, climbed to 2.1% YoY in January from 1.8% in December. 

Traders reduce their bets for an interest rate cut from the Bank of Canada (BoC) in March after the CPI inflation data. The markets are now pricing in a nearly 63% chance that the BoC will hold rates steady at the March meeting, compared to 56% before the data was released.

On the USD’s front, San Francisco Fed President Mary Daly said on Tuesday that prospects of further rate cuts in 2025 remain uncertain despite an overall positive lean to US economic factors. Philadelphia Fed President Patrick Harker emphasized support for maintaining a steady interest rate policy, noting that inflation has remained elevated and persistent in recent months. 

Investors await remarks by Fed officials this week to gather more clues about the path ahead for US interest rates. Any hawkish comments from Fed policymakers could boost the Greenback in the near term. 

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.

 

Source: Fxstreet