Canadian Dollar loses ground then recovers after release of Crude inventory data

The Canadian Dollar trades up and down after data shows a lower-than-estimated Crude Oil inventory draw, reflecting weaker demand.
The US Dollar holds up surprisingly well despite lower-than-expected US housing data.

The Canadian Dollar (CAD) trades lower then recovers against the US Dollar (USD) on Tuesday, after Crude Oil prices give up their gains on the back of US data showing a lower-than-expected Oil inventory draw. US Building Permits and Housing Starts data came out lower-than-expected which ought to have weighed on USD and benefited CAD, but had the opposite effect.

The USD/CAD pair is trading in the 1.31s during the US session.

Canadian Dollar news and market movers

The Canadian Dollar edges lower then recovers after Crude Oil prices give up gains on the back of US Oil inventory data from the Energy Information Administration (EIA), showing a lower-than-forecast draw on US inventories.
EIA Crude OIl Stocks Change in the week ending July 14, came in at -0.708M against analyst's estimates of 2.44M and a gain of 5.946M in the week before. This suggests lower-than-expected demand for Crude Oil, which falls after the news.
The Canadian Dollar lost ground after the release of weak US housing data from the US Census Bureau. Building Permits in June undershot expectations, coming out at 1.44M compared to the 1.49M forecast and the 1.496M previous. Building Permits are a leading indicator for the economy so a lower-than-expected result is not a positive sign for the US economy. That said, USD strengthened versus CAD after the release.
US Housing starts fared no better, falling -8.0% YoY in June when a 7.2% rise had been forecast from a 15.7% YoY increase in May. That translated into 1.434M Housing Starts versus the 1.48M forecast and 1.559M previous print. A slowing housing market is generally a signal that interest rates are biting and the US Federal Reserve will have to consider carefully whether to raise them much higher in the future. This is normally bearish for USD but the opposite seems to be the case on this occasion.
Last Friday saw a strong reversal in USD/CAD on the back of a combination of weaker Crude Oil prices, which weighed on CAD, and much better-than-expected Michigan Consumer Sentiment data out of the US, which supported the US Dollar.

Canadian Dollar Technical Analysis: Monday’s weak close disappoints bulls

USD/CAD is in a long-term uptrend on the weekly chart, which began at the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within that uptrend. Given the old adage that ‘the trend is your friend’, however, the probabilities of an eventual continuation higher marginally favor longs over shorts.

USD/CAD appears to have completed a large measured move price pattern that began forming at the March highs. This pattern resembles a 3-wave ABC correction, in which the first and third waves are of a similar length (labeled waves A and C on the chart below).

US Dollar vs Canadian Dollar: Weekly Chart

A confluence of support situated in the upper 1.3000s, which is made up of several longer moving averages and a major trendline, prevented last week’s decline from extending any lower and provided a foundation for the reversal on Friday.

US Dollar vs Canadian Dollar: Daily Chart

The long green up-bar that formed on Friday is a bullish engulfing Japanese candlestick reversal pattern. When combined with the long red down bar that formed immediately before it the two together also complete another bullish reversal pattern – a two-bar reversal.

Monday’s weak close, however, has brought into doubt the bullish conviction in the reversal and failed to confirm the promise shown by the bullish engulfing or the two-bar pattern.

It will take a decisive break above the 50-day Simple Moving Average (SMA) at circa 1.3400 to refresh and reconfirm the USD/CAD long-term uptrend. Nevertheless, bulls marginally have the upper hand, with the odds slightly favoring a recovery and a continuation higher.

Only a decisive break below 1.3050 would indicate the thick band of weighty support in the upper 1.30s has been definitively broken, thereby bringing the uptrend into doubt.

Canadian Dollar FAQs

What key factors drive 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 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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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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