The Canadian Dollar is at a crossroads as it tracks a perfect storm of economic conditions. The economic health of the US economy has a direct impact on the value of the Canadian Dollar. That’s mostly because the United States is Canada’s biggest trading partner. Movers & Shakers Market observers are keying in on the next inflation data and major economic indicators that might change the flow of currencies.
Tuesday 18 July Canada will release its Consumer Price Index (CPI) for the month of July. With wide eyes, this release will be closely watched for clues on the country’s inflationary pressures. This report will come out against the backdrop of rapidly rising US inflation. Prospects for the second order effects of this trend to materially change the investor sentiment and flow of the USD. Although, with such pressures on the Canadian Dollar, you would hardly know it in early trading this week.
Economic Interdependencies
The interconnected nature of the Canadian and US economies plays a major role in the Canadian Dollar performance. Whether the US economy is recovering or not, Canadian exports will continue to feel the immediate impact. Moreover, the strength of the USD tends to drive Canadian trade balances in the opposite direction. Political squabbles and adverse market fluctuations are capable of sending ripple effects through both economies.
Market analysts have pointed out that inflation dynamics in each country are becoming paramount. Canada’s headline inflation should fall to 1.7% y/y. It might see a monthly uptick of 0.4%. Those trends are arcane, and yet all-important as they affect monetary policy actions taken by the Bank of Canada (BoC). The Bank of Canada’s interest rates, therefore, have a crucial influence on the attractiveness of the Canadian Dollar. It’s more important than ever to stay tuned to these developments.
Investors are eager to see the Trade Balance. This important metric measures how much higher or lower Canada’s exports of goods and services are than its imports. Like many countries, a widening trade deficit would have the effect of weakening the Canadian Dollar, and a surplus the opposite. These economic indicators, even when measured in lagging installments, help explain the short-term fluctuations in currency value.
Inflationary Pressures
Inflation remains a top concern for both sides of the Canada–U.S. For Canada, the CPI numbers scheduled for release later this week will offer a clearer picture of home-grown inflation trends. High inflation reduces consumer real incomes and exerts a negative influence on economic growth, damaging the currency in the process.
In the past few weeks, we have started to see signs that inflationary pressures in the US are on the move upward once again. This has driven strong renewed flows back into the USD, putting a lot of pressure on the Canadian Dollar. As investors consider their investment options, they tend to flock to currencies whose economic fundamentals are strong, and inflation is low. Further data from each country is poised to flip market sentiment. Looking ahead, USDCAD will be the key market to watch for short term direction of the CDN Dollar.
Additionally, global oil prices continue to be a first order driver of Canada’s economy, with petroleum as Canada’s biggest export. In fact, any rise or drop in oil prices results in an almost instantaneous change in the value of the Canadian Dollar. Indeed, oil exports account for nearly half of Canada’s trade surplus. In order to maintain the currency strong, predictability and reliability in this sector is needed.
Upcoming Economic Events
This week is not short of major economic events that will set market expectations, so we urge you to prepare. The Jackson Hole Economic Symposium hosted by the Federal Reserve Bank of Kansas is one such event that could provide insights into future monetary policy changes in the US. What’s been discussed and what emerges from this symposium might cause big tsunamis within international capital markets. This may further weaken the value of the Canadian Dollar.
Market participants are understandably waiting with bated breath for these developments. They hope to measure the extent to which central banks can—or should—tighten monetary policy to counteract this newfound inflationary persistence. Likewise, interest rates and inflation will be the important determinants for each country. They will need to tread lightly as they seek to stimulate economic recovery in a post-COVID world.