- Outflows from the Canadian dollar continue on Tuesday, while investors take refuge in the US dollar.
- Canadian PMIs and jobs data will be released later in the week, but US NFP will overshadow the day.
- Oil prices are bouncing for Tuesday, providing limited support for the CAD.
He Canadian dollar (CAD) keeps falling in front of US dollar (USD), as risk-averse flows into the market remain the overall theme for investors on Tuesday. The oil-dependent CAD is only getting a little support from crude oil prices, which are seeing a small rebound after halting a three-day decline.
The Purchasing Managers’ Index (PMI) and employment rate will be released in Canada this week, on Thursday and Friday respectively, but the impact on markets will likely remain muted as investors jostle for positioning ahead of the US Nonfarm Payrolls (NFP) release on Friday.
Daily summary of market movements: Canadian dollar continues to lose ground, USD/CAD nears 1.3700
- USD/CAD crossed the technical barrier of 1.3700 early on Tuesday, and the pair reached daily highs of 1.3736.
- The US dollar remains on the rise in overly cautious markets as investor confidence returns.
- Rising US Treasury yields, weak global growth prospects, rising oil prices due to supply constraints, and a near-term government funding patch for the US .are sending investors towards the safe haven of the USD.
- Crude oil prices are rebounding after three consecutive days of declines as the CAD tries to stem the decline against the USD.
- Economists at several big banks are starting to warn that USD/CAD could be poised for a rebound if market flows calm down.
- Scotiabank economists noted that a firm showing of Canadian data this week is needed to bolster expectations of another rate hike from the Bank of Canada (BoC).
- MUFG Bank economists do not see the USD/CAD pair returning to the 1.3600 area until the end of the fourth quarter.
- The US-Canada rate differential remains the key issue limiting flows on the USD/CAD chart according to HSBC analysts.
Technical Analysis: Canadian Dollar Hits 1.3736 as Markets Extend Risk Aversion Stack Towards US Dollar
Canadian Dollar (CAD) selling reached an intraday high of 1.3736 on Tuesday’s session, and US Dollar bulls are trying to build a price floor from the 1.3700 area.
USD/CAD is up almost 2.5% since last Friday’s drop to 1.3417, where the pair suffered a technical rejection from the 200-day simple moving average (SMA).
If the uptrend continues, USD/CAD could challenge 1.3860, an area that the pair has not reached since March.
Hourly candles show USD/CAD steadily rising, while short interest fails to push the pair back towards the 34-hour EMA. Bullish momentum appears to be running out, and the Relative Strength Index (RSI) is breaking out of overbought territory.
Sellers will want to build up enough momentum for the pair to pull back to 1.3560 near the 100 hourly SMA, while bidders will look to mark a new high of the day beyond 1.3736.
Frequently Asked Questions about the Canadian Dollar
What factors determine the evolution of 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 Trade balance, which is the difference between the value of Canada’s exports versus its imports. Other factors are market sentiment, that is, whether investors are betting on riskier assets (risk appetite) or looking for safe havens (risk aversion), with risk appetite being positive for the CAD. As a major 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 influence the Canadian dollar?
The Bank of Canada (BoC) significantly influences the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BOC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively higher interest rates are usually positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the first being negative for the CAD and the second being positive for the CAD.
How does the price of oil influence the Canadian dollar?
The price of oil is a key factor influencing the value of the Canadian Dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD also rises, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to result in a higher probability of a positive Balance of Trade, which is also support for the CAD.
How does inflation data influence the value of the Canadian Dollar?
Although inflation has traditionally always been considered a negative factor for a currency, reducing the value of money, the opposite has actually happened in modern times, with the relaxation of cross-border capital controls. Inflation tends to lead central banks to raise interest rates, which attracts more capital from investors around the world looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.
How does economic data influence the value of the Canadian dollar?
Macroeconomic data releases measure the health of the economy and can influence the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 raise interest rates, resulting in a stronger currency. However, if economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
