- The US Dollar rally halts below 1.3945 with investors awaiting US employment data.
- Nonfarm Payrolls are expected to have declined significantly, but the unemployment rate is seen steady at 4.1%.
- Oil prices are rallying on speculation that Tehran is preparing a retaliation to Israel.
The Dollar is trading with marginal losses against its Canadian counterpart on Friday. A cautious market mood ahead of the all-important US payrolls report and higher oil prices have halted the pair’s rally.
Investors are wary about placing large US Dollar bets ahead of a particularly relevant US Nonfarm Payrolls report, with the Federal Reserve meeting less than one week away.
The US private sector is expected to have created 113K jobs in October, down from 254K in September. It is worth remembering that the impact of hurricanes and recent strikes might have distorted this month’s figures and that the unemployment rate will also be observed in case of a significant deviation from the forecasts.
On the other hand, Oil prices are rallying on the back of news reports that Iran would be considering a retaliation against Israel, which is providing additional support to the CAD.
The overall picture, however, shows the US Dollar’s upside trend intact, yet with a bearish divergence suggesting the possibility of a downside correction. Resistances are at 1.3945 ahead of the 1400 round level. Immediate support is at 1.3895 and below here, at 1.3840.
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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