Canadian Dollar corrects back after the release of strong US Consumer Sentiment data


  • US Dollar makes up ground against the Canadian Dollar after Michigan Consumer Sentiment data beats expectations. 

  • Canadian Dollar had rallied to new 2023 highs against the US Dollar after the BoC’s decision to raise rates at its meeting on Wednesday. 

  • Softer US inflation data out on Thursday was a drag on the US Dollar, further boosting CAD.

  • USD/CAD has fallen to a tough confluence of support at around 1.3100 and bounced on Friday. 

Canadian Dollar (CAD) pulls back versus the US Dollar (USD) on Friday, after the Michigan Consumer Sentiment Index for June beats expectations, improving the outlook for the US economy and supporting the Buck. The CAD had risen to new 2023 highs earlier in the day on a combination of softer US inflation and the Bank of Canada’s (BoC) decision to raise interest rates by 0.25%.

USD/CAD is trading in the1.31s during the US session on Friday.  

Canadian Dollar news and market movers 

  • The Canadian Dollar loses ground versus the US Dollar resulting in a rebound in the USD/CAD exchange rate after it reached a new low for the year. The turnaround came after the release of better-than-expected Michigan Consumer Sentiment Index data for June, which imporved the outlook for the US economy, supporting USD. 

  • The Canadian Dollar had traded to new year-to-date highs against the US Dollar after the US Bureau of Labor Statistics released PPI data for June on Thursday, and the results came out lower than expected. The softer inflation data supports the narrative initiated by Wednesday's Consumer Price Index data miss. 

  • The PPI data backs up the market's view that the Federal Reserve may only raise rates one more time in 2023, according to the CME FedWatch Tool, which calculates probabilities of future rate decisions based on the price of Fed Funds Futures. Since higher rates are bullish for currencies because they attract more foreign capital inflows, the suggestion the Fed may be 'one and done' weighed on the USD (negative for USD/CAD).

  • US PPI dropped to 0.1% from 0.9% YoY, falling way below estimates of 0.4%. On a monthly basis they rose by 0.1% which though higher than May's -0.4% was nevertheless below analysts' estimates of 0.2%. 

  • Core PPI (excluding Food & Energy) slowed to 2.4% from 2.8% at the same time in 2022, and below estimates of 2.6%. MoM Core PPI showed a 0.1% rise, which was below the 0.2% estimate and the same as the 0.1% of the prior month of May. 

  • The Canadian Dollar also traded higher after the BoC raised interest rates by 0.25%, bringing the overnight rate to 5.00% at its meeting on Wednesday. Higher rates were positive for CAD (negative for USD/CAD).

  • Governor Tiff Macklem stressed future policy decisions would be dependent on incoming data, leaving markets unclear on whether this would be the BoC’s last hike in the tightening cycle. 

  • The decision to raise rates at the July meeting had only been reached after a discussion by board members on the relative merits of leaving rates unchanged or raising them. 

  • “On balance, our assessment was the cost of delaying action was larger,” Macklem concluded.

  • Regarding inflation, the BoC Governor said that whilst it was welcome inflation in Canada had fallen to 3.4% in May – substantially below the 8.1% of last summer – a large number of items in the basket of goods used to calculate the Consumer Price Index (CPI) were still rising strongly. 

  • “A little over half the components of the CPI basket,” had seen their prices rising more than 5%, said Macklem in the press conference after the announcement. “If you look across the basket, meat is up 6%, bread is up 13%, coffee is up 8%, baby food is up 9% … rent is up 6%,” he added. 

  • Demand and consumption in the Canadian economy were still growing, said Macklem, indicating the possibility of inflation pressures ahead. 

  • The sensitive housing market had also defied expectations of a slow-down and was instead showing signs of picking up despite higher interest rates increasing mortgage repayments. 

  • Recent labor market stats showed 60K new jobs were filled in Canada in June, more than three times the estimated 20K. Average Hourly wages rose 3.9%, which though lower than the previous month’s 5.1%, was nevertheless buoyant. Despite the strong jobs number, the report also showed the Unemployment Rate unexpectedly rising to 5.4% from 5.2% in the previous month, and higher than the 5.3% forecast. 

  • All in all, the overall positive macroeconomic data from the Canadian economy leant the BoC governing council to make their decision to raise rates to stave off incoming inflationary effects rather than wait and see.

  • The BoC does not now see inflation returning to its 2% target until the middle of 2025, about 6 months later than its previous forecast. 

  • Although the Canadian Dollar rose on the BoC announcement, a growing number of analysts foresee a harsher climate for the currency in the second half of 2023.

  • Analysts at National Bank of Canada, Macquarie and Nomura Bank all foresee the CAD weakening in H2 of 2023. 

  • “Our bearish view for the second half 2023 remains predicated on the prospect that Canada will suffer a more severe slowdown than the U.S.,” said Thierry Wizman, global currencies and interest rate strategist at Macquarie Futures USA.

  • Wizman cites the negative impact higher interest rates will have on the Montreal Housing market as a major driver of a weaker CAD later in the year. 

  • “The rise in rates has already happened and households will begin to feel the squeeze as fixed-rate mortgages are rolled over at higher rates,” Wizman said, in a note quoted by the Financial Post. 

  • Nomura sees rate differentials and greater growth in the US as driving USD/CAD higher, to a possible target above 1.3700. 

  • The negative effect of a global economic slowdown on commodity prices negatively impacting Canada's terms of trade is the main factor dragging CAD down, according to National Bank of Canada in a note cited on Poundsterlinglive.com. 

  • The US Federal Reserve is almost certain to raise rates at its July 26 meeting, given the 5.3% Core CPI still prevalent in the US, which will probably boost the US Dollar.

  • Despite Wednesday’s lower-than-expected US inflation data, market gauges of the probability of a further rate hike from the Fed at their July 26 meeting put the chances at above 90%, although any further hikes in 2023 are now less probable than the Fed standing pat.  

Canadian Dollar Technical Analysis: Major support floor touched

Despite recent weakness, USD/CAD remains in a long-term uptrend on the weekly chart. Price is still above the major trendline drawn from the 2021 lows and a new sequence of descending peaks and troughs has not yet taken root. Given the old saying that ‘the trend is your friend’, the probabilities of an eventual continuation higher marginally favor longs over shorts.

Since October 2022, the exchange rate has been in a broadly sideways consolidation within the uptrend. Within that consolidation USD/CAD appears to have completed a large measured move price pattern that began forming at the March 2023 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). 

USD/CAD’s measured move looks lto have either completed or be in the process of completing, given waves A and C are of a similar length. 

US Dollar vs Canadian Dollar: Weekly Chart

A confluence of support situated under the June lows between 1.3070-1.3100, which is made up of several longer moving averages and a major trendline, provides a backstop to further losses. Only a decisive break below 1.3050 would indicate this thick band of weighty support has been definitively broken. This would also bring the longer-term uptrend into doubt. 

US Dollar vs Canadian Dollar: Daily Chart

The daily chart shows USD/CAD has declined all through this week and has now breached the June 27 (and year-to-date) lows at 1.3117. The price is unlikely to go much lower, however, as immediately below the June lows is the confluence of support mentioned above. Furthermore the price and RSI are showing a bullish convergence, with price making a lower low but RSI remaining higher than the June 27 low. This non-conformity means the move down sufferes from an underlying weakness and suggests the chance of a recovery. Only a clean break below 1.3050 would reverse the trend and suggest an overall more bearish picture for USD/CAD.  

On the other hand bulls have their work cut out for them and it will take a decisive break above the 50-day SMA at 1.3400 to reinvigorate the USD/CAD uptrend again. Bulls still marginally have the upper hand despite the bearish climate, with the odds slightly favoring an eventual recovery and a continuation higher. Key levels, however, are being threatened. 

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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

AUD/USD holds steady near 0.6250 ahead of RBA Minutes

AUD/USD holds steady near 0.6250 ahead of RBA Minutes

The AUD/USD pair trades on a flat note around 0.6250 during the early Asian session on Monday. Traders brace for the Reserve Bank of Australia Minutes released on Tuesday for some insight into the interest rate outlook.

AUD/USD News
USD/JPY consolidates around 156.50 area; bullish bias remains

USD/JPY consolidates around 156.50 area; bullish bias remains

USD/JPY holds steady around the mid-156.00s at the start of a new week and for now, seems to have stalled a modest pullback from the 158.00 neighborhood, or over a five-month top touched on Friday. Doubts over when the BoJ could hike rates again and a positive risk tone undermine the safe-haven JPY. 

USD/JPY News
Gold price bulls seem non-committed around $2,620 amid mixed cues

Gold price bulls seem non-committed around $2,620 amid mixed cues

Gold price struggles to capitalize on last week's goodish bounce from a one-month low and oscillates in a range during the Asian session on Monday. Geopolitical risks and trade war fears support the safe-haven XAU/USD. Meanwhile, the Fed's hawkish shift acts as a tailwind for the elevated US bond yields and a bullish USD, capping the non-yielding yellow metal.

Gold News
Week ahead: No festive cheer for the markets after hawkish Fed

Week ahead: No festive cheer for the markets after hawkish Fed

US and Japanese data in focus as markets wind down for Christmas. Gold and stocks bruised by Fed, but can the US dollar extend its gains? Risk of volatility amid thin trading and Treasury auctions.

Read more
Bank of England stays on hold, but a dovish front is building

Bank of England stays on hold, but a dovish front is building

Bank of England rates were maintained at 4.75% today, in line with expectations. However, the 6-3 vote split sent a moderately dovish signal to markets, prompting some dovish repricing and a weaker pound. We remain more dovish than market pricing for 2025.

Read more
Best Forex Brokers with Low Spreads

Best Forex Brokers with Low Spreads

VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.

Read More

Forex MAJORS

Cryptocurrencies

Signatures