- USD/CAD stalls this week’s recovery from the monthly low amid the emergence of some USD selling.
- Dovish Fed expectations, retreating US bond yields and a positive risk tone exert pressure on the USD.
- Softer Crude Oil prices could undermine the Loonie and help limit any further losses for spot prices.
The USD/CAD pair struggles to capitalize on a two-day-old recovery from sub-1.3700 levels, or a nearly one-month low touched earlier this week and attracts fresh sellers during the Asian session on Friday. Spot prices currently hover near the 50-day Simple Moving Average (SMA), around the 1.3725-1.3720 region, and a combination of diverging forces warrants some caution for bearish traders.
The initial market reaction to Thursday's upbeat US macro data turns out to be short-lived amid dovish Federal Reserve (Fed) expectations, which prompts fresh selling around the US Dollar (USD) and the USD/CAD pair. In fact, US Retail Sales rose more than expected in July, which, along with a still resilient labor market, eased concerns about a sharp slowdown in the world's biggest economy. This forced investors to scale back their bets for a more aggressive policy easing by the US central bank.
The markets, however, have fully priced in the prospects for an imminent start of the Fed's rate-cutting cycle in September. This, in turn, triggers a fresh leg down in the US Treasury bond yields, which, along with a generally positive tone around the equity markets, is seen exerting some downward pressure on the safe-haven buck. That said, a modest downtick in Crude Oil prices might undermine demand for the commodity-linked Loonie and help limit any meaningful downfall for the USD/CAD pair.
Hence, it will be prudent to wait for acceptance below the 1.3700 mark before traders start positioning for an extension of the pair's recent sharp pullback from the vicinity of mid-1.3900s, or the highest level since October 2022 touched earlier this month. Traders now look to the second-tier US macro data – Building Starts and Housing Permits, along with the Preliminary Michigan Consumer Sentiment Index – to grab short-term opportunities later during the early North American session.
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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