- USD/CAD continues losing ground for the fifth straight day and drops to a multi-month low.
- The narrowing US-Canada rate differential continues to benefit the CAD and exerts pressure.
- Bearish Oil prices and a modest USD strength also do little to lend any support to the major.
The USD/CAD pair prolongs its sharp retracement slide from the vicinity of the mid-1.3900s, or the highest level since October 2022 touched earlier this month and remains under some selling pressure for the fifth straight day on Thursday. The downward trajectory drags spot prices to the 1.3575-1.3570 area, or over a four-month low during the first half of the European session and confirms a near-term breakdown through the very important 200-day Simple Moving Average (SMA).
Investors seem convinced that the Federal Reserve (Fed) will start lowering borrowing costs in September. In fact, the markets started pricing in the possibility of a larger-than-normal, 50 basis points (bps) rate next month after data released on Wednesday suggested that the US labor market was not as strong as estimated. This, in turn, will result in the narrowing of the rate differential between the US and Canada, which is seen driving flows towards the Canadian Dollar (CAD) and dragging the USD/CAD pair lower.
The downward trajectory, meanwhile, seemed rather unaffected by bearish Crude Oil prices, which tend to undermine demand for the commodity-linked Loonie. The revised US employment statistics revived recession fears in the world's largest fuel consumer and comes on top of persistent worries about a slowdown in China – the world's second-largest economy and the largest Oil importer. This, in turn, keeps Crude Oil prices depressed just above a multi-month low touched on August 5, albeit does little to ease the bearish pressure surrounding the USD/CAD pair. Even a modest US Dollar (USD) fails to lend support to the major.
An uptick in the US Treasury bond yields assists the USD in attracting some buyers and snapping a four-day losing streak to a fresh YTD low touched the previous day. That said, dovish Fed expectations might hold back the USD bulls from placing aggressive bets ahead of Thursday's release of the Weekly Initial Jobless Claims and Existing Home Sales data from the US. The focus, however, remains glued to the Fed Chair Jerome Powell's speech on Friday, which should provide some meaningful impetus to the USD/CAD 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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