- The US Dollar stalls below 1.3900 with the upside trend intact.
- Investors are trimming USD longs ahead of key US data releases.
- Weak Canadian data and lower Oil prices are limiting CAD's recovery.
The US Dollar is wavering below the 1.3900 level on Monday’s European morning session. A somewhat softer US Dollar is weighing on the pair, although the lower Oil prices are keeping Cad recovery attempts limited.
The Dollar is witnessing some profit-taking on Monday, as the market readies for a batch of first-tier US indicators, which will determine the size of next week’s Fed rate cut.
The Q3 US GDP is expected to highlight the US exceptionality, with a steady 3% yearly growth in the context of a global economic slowdown. In this context, market speculation of a Trump victory in the November 5 elections keeps underpinning the US Dollar.
Lower Oil prices and weak data will weigh on the CAD
On the other hand, crude prices, Canada’s main export have depreciated more than $4 from Friday’s close on easing concerns about a regional war in the Middle East. This is likely to put a lid on the Canadian Dollar’s recovery attempts.
Later today, BoC Governor Tiff Macklem will meet the press and he is unlikely to support the CAD. The weak retail consumption and housing prices seen on Friday suggest that the bank will keep lowering interest rates to support economic growth.
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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