Canadian Dollar lurches higher as Greenback withers
- The Canadian Dollar gained 0.5% against the US Dollar on Monday.
- Canadian Manufacturing Sales surprised to the upside in July, bolstering economic confidence.
- The Fed’s upcoming rate call on Wednesday is looming large over markets, suppressing Greenback flows.
The Canadian Dollar (CAD) found a strong surge of bidding momentum on Monday, kicking off the new trading week with strong bullish pressure. The US Dollar (USD) is waffling across the board ahead of the Federal Reserve’s (Fed) critical upcoming interest rate decision, and this week will prove a policy challenge for Loonie traders with both the Fed and the Bank of Canada (BoC) on the cards for Wednesday.
Daily digest market movers: Canadian Dollar gets a leg up from weak pre-Fed Greenback flows
- The Canadian Dollar rose one-half of one percent against the US Dollar on Monday, plunging USD/CAD back below the 1.3800 handle.
- Canadian Manufacturing Sales in July came in higher than expected, climbing to 2.5% MoM versus the expected uptick to 1.8% from the previous month’s 0.3% slump. However, the data is months out of date, and likely had no meaningful impact on Loonie flows halfway through September.
- The BoC is expected to deliver an interest rate cut on Wednesday as the Canadian economy continues to wither under the weight of stiff trade tariffs from the Trump administration, with no clear goal in sight. The overwhelming majority of meaningful trade between the US and Canada remains entirely exempt from tariffs by Trump’s own hand-crafted USMCA trade deal.
- The Fed is also looming ahead on Wednesday, and is also expected to deliver an interest rate cut.
- Markets have run well ahead of the front end of the rate curve, with investors largely interested to see if the Fed agrees with the general rates assessment of three straight cuts through the end of the year.
Canadian Dollar price forecast
The Canadian Dollar’s firm upswing on Monday has confirmed a bearish rejection of the 200-day Exponential Moving Average (EMA) on the USD/CAD chart, pushing the pair back below 1.3800 and putting the pair on pace to take a fresh bearish run at a technical support zone near 1.3740.
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.
Recommended Articles
