- USD/CAD fails to build on yesterday’s modest rebound from multi-week lows.
- Dovish Fed expectations and a positive risk tone weigh on the USD, limiting the pair’s gains.
- A rebound in crude oil prices benefits the CAD and contributes to the modest decline.
The USD/CAD pair fails to build on the previous day’s late bounce from a four-week low and attracts some intraday sellers near the 1.3725 region on Thursday. However, the pair manages to defend the 1.3700 level during the early part of the European session as traders now turn their attention to the US macroeconomic data for fresh impetus.
US monthly retail sales, along with the usual weekly initial jobless claims, followed by the Empire State Manufacturing Index and the Philly Fed Manufacturing Index, will be released later during the early North American session. This, along with speeches from influential FOMC members, will play a key role in the demand for the US Dollar (USD) and produce short-term trading opportunities around the USD/CAD pair.
Meanwhile, expectations of an imminent start of the Federal Reserve (Fed) rate-cutting cycle, reinforced by signs of cooling inflationary pressures, keep USD bulls on the defensive. Moreover, a generally positive tone around the equity markets further weighs on the safe-haven dollar. Apart from this, a rebound in crude oil prices lends support to the commodity-linked CAD and exerts some pressure on the USD/CAD pair.
Against the backdrop of concerns over a wider conflict in the Middle East, hopes that US rate cuts will boost economic activity and fuel consumption are acting as a tailwind for crude oil. That said, concerns over slower global demand could curb the commodity’s gains. Apart from this, expectations of another 25 basis point rate cut by the Bank of Canada (BoC) in September could cap the Canadian dollar (CAD) and limit losses for the USD/CAD pair.
From a technical perspective, this week’s break through the 50-day simple moving average (SMA) suggests that the path of least resistance for the pair is to the downside. Sustained weakness and acceptance below the 1.3700 level will reaffirm the negative bias, which should pave the way for an extension of the sharp pullback in the USD/CAD pair from the 1.3945 area, or the highest level since October 2022 reached earlier this month.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. 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) exerts significant influence over 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 high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.
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 rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures 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 confidence 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 can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the 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.
