USD/CAD advances to nearly two-week high, above mid-1.3700s ahead of US data
- USD/CAD attracts follow-through buyers for the fourth consecutive day on Tuesday.
- The ongoing USD positive move and retreating Oil prices act as a tailwind for the pair.
- Traders look to US data for some impetus ahead of the FOMC decision on Wednesday.
The USD/CAD pair prolongs its uptrend for the fourth straight day on Tuesday and climbs to a one-and-a-half-week top, above mid-1.3700s during the early European session. The momentum is sponsored by sustained US Dollar (USD) buying. Adding to this, a modest downtick in Crude Oil prices is seen undermining the commodity-linked Loonie and acting as a tailwind for spot prices.
The upbeat US macro data released last week pointed to a still resilient labor market. Moreover, concerns that higher US tariffs would reignite inflationary pressures in the second half of the year suggest that the Federal Reserve (Fed) would maintain the status quo at the end of a two-day policy meeting on Wednesday. This, in turn, lifts the USD Index (DXY), which tracks the Greenback against a basket of currencies, to over a one-month peak and turns out to be a key factor pushing the USD/CAD pair higher.
Meanwhile, a broadly firmer buck is seen weighing on USD-denominated commodities, including Crude Oil prices. Moreover, US President Donald Trump's punishing 35% tariffs on imports from Canada seem to exert pressure on the Canadian Dollar (CAD) and contribute to the bid tone surrounding the USD/CAD pair. This, in turn, backs the case for a further near-term appreciating move for spot prices, though bulls might refrain from placing fresh bets and wait for more cues about the Fed's rate-cut path.
Hence, the focus will remain glued to the crucial FOMC meeting starting this Tuesday. The US central bank is widely expected to keep interest rates steady. Investors, however, will closely scrutinize the accompanying policy statement and Fed Chair Jerome Powell's comments at the post-meeting press conference. This, in turn, will influence the USD and provide a fresh impetus to the USD/CAD pair. In the meantime, Tuesday's US macro data could produce short-term opportunities later during the North American session.
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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