- USD/CAD attracts sellers for the fourth straight day and seems vulnerable to slide further.
- An uptick in Crude Oil prices and reduced bets for a BoC rate cut underpin the Loonie.
- US fiscal concerns and dovish Fed expectations weigh on the USD and the currency pair.
The USD/CAD pair struggles to capitalize on the overnight bounce from the 1.3815-1.3810 region, or a two-week low, and trades with a negative bias for the fourth consecutive day on Thursday. Spot prices trade around mid-1.3800s during the Asian session and seem vulnerable to extend the weekly downtrend.
Crude Oil prices regain positive traction following the previous day’s pullback from a nearly one-month top on the back of the uncertainty over US-Iran nuclear talks. Adding to this, hotter-than-expected Canadian core inflation figures released on Tuesday dampened hopes for a Bank of Canada (BoC) rate cut in June, which, in turn, is seen underpinning the commodity-linked Loonie. This, along with the prevalent US Dollar (USD) selling bias, exerts some downward pressure on the USD/CAD pair.
Investors remain on edge following the US sovereign credit rating downgrade by Moody’s and growing worries about rising US deficit in the wake of US President Donald Trump’s sweeping tax bill. Moreover, renewed US-China trade tensions and bets that the Federal Reserve (Fed) will lower borrowing costs in 2025 keep the USD depressed near a two-week low. This further contributes to the offered tone surrounding the USD/CAD pair and validates the near-term negative outlook.
Even from a technical perspective, the recent failure near the very important 200-day Simple Moving Average (SMA) and a subsequent breakdown below the 1.3900 mark, or the lower boundary of a short-term trading range, favors bearish traders. This, in turn, suggests that the path of least resistance for the USD/CAD pair remains to the downside. Traders now look forward to the release of flash global PMIs and the US macro data for short-term opportunities.
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.