USD/CAD remains near multi-week low, flirts with 1.3700 ahead of US macro data
- USD/CAD is struggling to capitalize on the previous day’s modest recovery from multi-week lows.
- Dovish Fed expectations and positive risk sentiment are weighing on the USD and limiting the pair’s gains.
- A rise in crude oil prices supports the Loonie and contributes to the moderate downward trend.
The USD/CAD pair is struggling to capitalize on the late bounce from the previous day’s four-week low, attracting some intraday sellers near the 1.3725 region on Thursday. However, spot prices may defend the 1.3700 mark during the early part of the European session as traders now look to the US macro data for fresh impetus.
The monthly US retail sales as well as the usual weekly initial jobless claims, followed by the Empire State Manufacturing Index and the Philly Fed Manufacturing Index, will be released later during the early North American session. This, along with speeches from influential FOM members, will play a key role in boosting demand for the US dollar (USD) and creating short-term trading opportunities around the USD/CAD pair.
Meanwhile, expectations of an imminent start of the Federal Reserve’s (Fed) rate-cutting cycle, supported by signs of easing inflationary pressures, keep USD bulls on the defensive. Moreover, a generally positive tone in equity markets continues to undermine the safe-haven dollar. Apart from that, a rise in crude oil prices supports the commodity-linked loonie and puts some pressure on the USD/CAD pair.
Amid concerns about a wider conflict in the Middle East, hopes that US interest rate cuts will boost economic activity and fuel consumption are acting as tailwinds for the black liquid. However, concerns about weaker global demand could dampen the commodity’s gains. Apart from that, speculation of another 25 basis point rate cut by the Bank of Canada (BoC) in September could cap the Canadian dollar (CAD) and limit losses in the USD/CAD pair.
From a technical perspective, this week’s breakout of the 50-day SMA (Simple Moving Average) suggests that the path of least resistance for spot prices is to the downside. Sustained weakness and acceptance below the 1.3700 level will confirm the negative bias, which should pave the way for an extension of the USD/CAD pair’s sharp decline from the 1.3945 area, or the highest level since October 2022, reached earlier this month.
Frequently asked questions about the Canadian dollar
The main factors that affect the Canadian dollar (CAD) are the Bank of Canada (BoC) interest rate level, the price of oil, Canada’s largest export commodity, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and imports. Other factors include market sentiment – whether investors are looking to take on riskier assets (risk-taking) or seek safe havens (risk-averse) – with risk-taking being positive for the CAD. As the largest trading partner, the health of the US economy is also a major factor that affects the Canadian dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian dollar by setting the level of interest rates at which banks can lend money to each other. This affects the level of interest rates for everyone. The BoC’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to have a positive effect on the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former negatively affecting the CAD and the latter positively affecting the CAD.
The price of oil is a major factor that affects the value of the Canadian dollar. Petroleum is Canada’s largest export commodity, so the price of oil usually has a direct impact on the value of the CAD. When the price of oil rises, the CAD generally rises as well, as overall demand for the currency increases. The opposite is true when the price of oil falls. Higher oil prices also tend to lead to a greater likelihood of a positive trade balance, which also supports the CAD.
While inflation has traditionally always been seen as a negative factor for a currency as it reduces the value of money, in modern times with the loosening of cross-border capital controls, the opposite is actually true. Higher inflation tends to cause central banks to raise interest rates, which leads to more capital inflows from global investors looking for a lucrative investment opportunity for their money. This increases the demand for the local currency, in the case of Canada, that is the Canadian dollar.
The release of macroeconomic data is an indicator of the health of the economy and can impact the Canadian dollar. Indicators such as GDP, manufacturing and services purchasing managers’ indices, 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 can also encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is weak, the CAD is likely to fall.
