The USD/CAD pair has been on a downward trend for the past three days, as the Canadian dollar gains strength from the rally in oil prices and the anticipation of strong labor market data. The US dollar, on the other hand, faces pressure from the uncertainty over the upcoming inflation report and the global economic slowdown.
Oil Prices Boost the Loonie
One of the main drivers of the USD/CAD pair is the price of oil, as Canada is a major exporter of crude oil to the US. The oil market has been on a bullish run lately, as OPEC and its allies maintain their production cuts and see robust demand for energy. The oil price has soared to near $90 per barrel, the highest level since 2014.
The rise in oil prices has boosted the Canadian dollar, as it increases the value of Canada’s exports and improves its terms of trade. The Loonie has also benefited from the positive outlook for the Canadian economy, which is expected to rebound strongly from the pandemic-induced recession.
US Inflation Data in Focus
The US dollar, meanwhile, has been under pressure from the uncertainty over the inflation outlook and the monetary policy stance of the Federal Reserve. The US inflation data for August is due on Wednesday, and it is expected to show a 0.6% increase in the headline CPI, up from 0.2% in July. The core CPI, which excludes volatile food and energy prices, is forecast to rise by 0.2%, unchanged from the previous month.
The inflation report will be closely watched by investors and policymakers, as it could have implications for the Fed’s tapering plans and interest rate hikes. The Fed has been signaling that it will start reducing its bond purchases later this year, but it has also stressed that it will be patient and flexible in adjusting its policy stance depending on the economic conditions.
A higher-than-expected inflation reading could raise concerns that inflation is becoming more persistent and widespread, and that the Fed may have to tighten its policy sooner and faster than anticipated. A lower-than-expected inflation reading, on the other hand, could ease some of the inflation fears and support the Fed’s view that inflation is transitory and will moderate as the supply chain disruptions and labor market frictions resolve.
Canadian Labor Market Data Could Force BoC to Hike Rates
Another factor that could influence the USD/CAD pair is the Canadian labor market data for August, which is scheduled for Friday. The Canadian economy is expected to have added 39.9K jobs in August, more than double the consensus estimate of 15K. The unemployment rate is expected to remain unchanged at 5.5%, while the participation rate is expected to edge up to 65.3% from 65.2%.
The Canadian labor market data could have implications for the Bank of Canada’s (BoC) monetary policy stance, as it could indicate how close the economy is to reaching its full potential and generating inflationary pressures. The BoC has already started tapering its bond purchases in July, and it has indicated that it will continue to do so until it reaches a minimum pace of $2 billion per week.
The BoC has also said that it will not raise its policy interest rate until the economic slack is absorbed and inflation is sustainably within its target range of 1% to 3%. The BoC’s latest projections suggest that this will happen sometime in the second half of 2022.
However, if the Canadian labor market data comes in stronger than expected, it could signal that the economy is recovering faster than anticipated and that inflation could rise sooner than expected. This could force the BoC to hike its interest rate earlier than projected, which would support the Canadian dollar and weigh on the USD/CAD pair.
