USD/CAD falls toward 1.3700 due to improved risk sentiment, Oil’s weekly gains
|- USD/CAD edges lower as crude Oil prices are set to end the week higher.
- The US Dollar remains weaker ahead of the Michigan Consumer Sentiment Index release for August.
- Traders fully price in a 25 basis point rate cut at the Fed’s next meeting in September.
USD/CAD halts its two days of gains, trading around 1.3720 during the Asian hours on Friday. The Canadian Dollar (CAD) receives support from the improved risk-on mood following the stronger-than-expected recovery in US Retail Sales, which has eased concerns about a potential recession in the United States (US).
The commodity-linked CAD may continue to advance, as crude Oil prices are poised to end the week higher. This increase comes on the heels of recent US economic data that boosted optimism over demand in the world’s top Oil-consuming nation. Given the fact that Canada is the largest crude exporter to the US. At the time of writing, the price of West Texas Intermediate (WTI) oil is trading near $76.60 per barrel.
In the United States, traders await the preliminary US Michigan Consumer Sentiment Index for August and Building Permits for July to be released later in the North American session on Friday.
The US Dollar (USD) depreciates as traders fully price in a 25 basis point rate reduction by the US Federal Reserve for September. However, a 50 basis point cut remains a possibility, with the CME FedWatch tool indicating a 26% chance of such a move.
However, the Greenback received support following recent better-than-expected US figures released on Thursday. The US Census Bureau reported that US Retail Sales climbed 1.0% month-over-month in July, a sharp turnaround from June's 0.2% decline, surpassing the projected 0.3% increase. Moreover, Initial Jobless Claims for the week ending August 9 reached 227,000, lower than the forecast of 235,000 and down from 234,000 the previous week.
Canadian Dollar FAQs
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 the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge 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 sentiment surveys can all 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 put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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