Canadian Dollar freezes in place as Loonie fails to bounce back
- The Canadian Dollar found little room to move on Wednesday.
- The Loonie is grappling with the latest inflation data out of Canada.
- Central bank policy statements and US data to drive markets through the rest of the week.
The Canadian Dollar (CAD) is struggling to find momentum heading through the midweek. The Loonie took a fresh hit after Canadian Consumer Price Index (CPI) inflation eased slightly, but otherwise gave no clear direction for the Bank of Canada (BoC) to operate with.
The remainder of the trading week will be fully focused on US economic data and Fed policymaker speeches. US Purchasing Managers Index (PMI) survey results for August will be released on Thursday, and the annual Jackson Hole Economic Symposium also kicks off on the same day. However, investors will be looking ahead to Federal Reserve (Fed) Chair Jerome Powell’s appearance at Jackson Hole on Friday.
Daily digest market movers: Canadian Dollar treads water after Loonie traders left nonplussed by key Canadian data
- The Canadian Dollar remains stuck near familiar levels as Loonie momentum runs out of gas.
- Defensive CAD positioning is holding the Loonie in place against the US Dollar for now.
- The latest Fed Meeting Minutes revealed Fed policymakers may not be as close to rate cuts as many are hoping.
- Despite the surprisingly hawkish tilt to the last Fed meeting, the minutes do pre-date the last round of sour US hiring data, muting any immediate impact from hawkish overtones.
- US PMI data due on Thursday is expected to show a further tempering of business operator sentiment.
USD/CAD price forecast
USD/CAD got pushed back into multi-week highs, and the pair is now poised to close higher for the second week in a row if CAD weakness holds through the end of the week. USD/CAD is inching back toward the 200-day Exponential Moving Average (EMA) near 1.3880, which should provide significant technical resistance for bidders to contend with.
USD/CAD daily chart
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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