The impact on the Canadian Dollar (CAD) was immediate and severe on Thursday. That decline was exacerbated by a multi-year surge in the value of the US Dollar (USD). The CAD weakened by 0.5% versus the USD. This turn brings to an end a notable triumphant run for the currency. Here are some reasons that fueled this movement, including recent economic indicators and major market trends.
CAD depreciation in part attributable to economic shock from the pandemic, rising inflationary pressures. Those key drivers are the accelerating interest rates decided upon by the Bank of Canada (BoC), the rising and falling pricing of oil, and the robustness of Canada’s economy. Lastly, inflation trends and trade balance measures have an important influence on the value of this currency. The CAD’s performance is closely linked to the health of the US economy, given that the United States is Canada’s largest trading partner.
Factors Driving CAD Down
The Canadian Dollar on Thursday sank by over 0.5% versus the Greenback. Much of this decline was due to the sharp increase in US PPI inflation numbers. Back in July, the PPI inflation had jumped up to 3.3% YoY. This major increase changed investor sentiment to safe-haven assets and drove demand for the USD. There too, core PPI inflation jumped to 3.7%, a dramatic spike from the last period’s 2.6%. The sudden jump in US inflation surprised most market participants. Consequently, they all rushed to the USD, placing additional downward pressure on the CAD.
The USD/CAD currency pair has now been strongly driven back above the 1.3800 level after almost two weeks of building support. This shift marks increased turbulence and is part of a larger market response to the rapidly evolving economic environment. Traders are recalibrating their expectations based on the stronger-than-expected economic news. At the same time, CAD’s volatile exchange rate with USD raises concerns about what may happen next.
Influence of Oil Prices
Lastly, oil prices have an outsized influence on the Canadian economy and therefore on the value of the CAD, due to petroleum being Canada’s most important export. When oil prices go down, the CAD is typically under downward pressure. On the flip side, a rise in oil prices usually boosts its value. A large piece of oil’s importance in Canada’s overall trade surplus comes from Canada’s trade balance. As a consequence, the CAD’s fortunes are immediately affected by swings in oil prices.
As we know, today, global oil prices are extremely unstable as rising geopolitical tensions and supply-side and demand-side dynamics—all at play. With each new piece of information, as traders react to these developments, they frequently reset their expectations for the CAD. A continued rise in the price of oil would go a long way toward buoying the CAD going forward. If oil prices fall, it would compound the CAD’s current difficulties amid a rising USD.
Economic Indicators and Trade Balance
Four of the most important economic indicators to watch that can set the Canadian Dollar’s direction include. The positive outlook on the Canadian economy directly informs investor confidence and the performance of the Canadian currency. Recent economic data that speaks to Canada’s positive growth prospects has everyone scrambling to interpret what it all means.
Additionally, Canada’s trade balance—the difference between what Canada exports and what it imports—provides further context for understanding the CAD’s strength. After a positive trade balance typically strengthens the CAD, a negative trade balance may cause the CAD to depreciate. New figures show that Canada can’t afford to continue such a disastrous trade deficit. This is because, in part, it has unpredictable global demand for all the stuff they export.
The picture is only complicated by the fact that inflation rates are extremely high within Canada as well. Higher inflation can reduce consumers’ purchasing power, which can depress consumer spending and, in turn, economic growth. So inflation is increasing and wages are not keeping up. In turn, such a development would hurt consumer confidence and dampen a potential rebound in economic activity that might weigh on the CAD.