Canadian Dollar tests fresh seven-month highs amid quiet start to the week
- The Canadian Dollar tested new seven-month peaks against the US Dollar on Monday.
- A quiet start to the trading week thanks to the US holiday.
- Key Canadian GDP figures loom ahead, CAD traders braced for growth slump.
The Canadian Dollar (CAD) kicked off the new trading week on a high note, kicking into fresh seven-month highs against the US Dollar (USD) and driving USD/CAD down into the 1.3700 handle for the first time since mid-October. However, bullish Loonie momentum remained constrained with US markets shuttered for the Memorial Day long weekend, and the CAD settled back within last week’s closing range.
Canadian Gross Domestic Product (GDP) growth data will be dropping, quite literally, later this week. CAD markets are broadly bracing for a sharp decline in annualized Canadian GDP growth, with economists expecting that the Canadian economy has already begun to fall into a recession.
Daily digest market movers: Canadian tests cautiously higher ahead of key GDP figures this week
- Holiday-thinned markets cause the Loonie to jitter on Monday, but Loonie strength hit a low-volume wall, limiting upside potential.
- US session market flows are largely dark on an extended long weekend.
- Canadian GDP is expected to tumble to 1.6% from 2.6% during the first quarter.
- The Canadian Unemployment Rate is expected to rise once again.
- USD traders will be on the lookout for key US GDP and inflation figures this week, as well as the Federal Reserve’s (Fed) latest Meeting Minutes, due on Wednesday.
Canadian Dollar price forecast
Despite a quick shove into a new seven-month high during early Monday trading, USD/CAD has pushed back into the midrange following a technical rejection of 1.3700. USD/CAD continues to trade on the south side of the 200-day Exponential Moving Average (EMA) near 1.4020. Despite fresh highs bolstering the Loonie, USD/CAD is poised for a technical recovery. Technical oscillators have declined rapidly, plunging firmly into oversold territory.
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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