- USD/CAD bulls remain on the defensive amid a modest USD pullback from a two-month top.
- Expectations for a less aggressive Fed policy easing to limit losses for the USD and the major.
- Bets for a larger BoC rate cut and weaker Crude Oil prices could also offer support to the pair.
The USD/CAD pair struggles to capitalize on a modest Asian session uptick on Wednesday and remains below its highest level since August 6, around the 1.3835-1.3840 region touched the previous day. Spot prices currently trade around the 1.3775 region, nearly unchanged for the day, though the fundamental backdrop supports prospects for an extension of the recent strong rally witnessed over the past three weeks or so.
The US Dollar (USD) eases from over a two-month high touched earlier this week and turns out to be a key factor acting as a headwind for the USD/CAD pair. That said, any meaningful USD corrective decline still seems elusive in the wake of firming expectations for a less aggressive policy easing by the Federal Reserve (Fed) and a regular 25 basis points (bps) interest rate cut in November. Apart from this, bets for a larger, 50 bps rate cut by the Bank of Canada, bolstered by softer domestic consumer inflation figures, might continue to weigh on the Canadian Dollar (CAD) and offer some support to the currency pair.
A report from Statistics Canada released on Tuesday showed that the headline Consumer Price Index (CPI) contracted by 0.4% in September and the yearly rate decelerated from 2.0% in August to 1.6%. This marks the smallest annual increase since February 2021 and raises hopes for a larger-than-usual BoC rate cut next week. Furthermore, a bearish sentiment around Crude Oil prices, led by easing fears of supply disruptions from the Middle East, could undermine the commodity-linked Loonie. This, in turn, validates the positive outlook for the USD/CAD pair and suggests that the path of least resistance remains to the upside.
Even from a technical perspective, the Relative Strength Index (RSI) eased from slightly overbought conditions on the daily chart and supports prospects for the emergence of some dip-buying at lower levels. Hence, it will be prudent to wait for strong follow-through selling before confirming that the USD/CAD pair has topped out in the near term and positioning for any meaningful corrective decline. Traders now look to the Canadian economic docket – featuring the release of Manufacturing Sales and Housing Starts. Apart from this, the USD and Crude Oil price dynamics should provide some impetus to the currency pair.
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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