USD/CAD sticks to modest intraday gains above 1.3800 ahead of US PCE data
- USD/CAD attracts some dip-buying on Friday amid a modest USD uptick.
- Weaker Oil prices undermine the Loonie and further support the major.
- Traders now await the US PCE Price Index before placing directional bets.
The USD/CAD pair regains positive traction on Friday and reverses a part of the previous day's retracement slide from the 1.3860 area, or a one-week high. Spot prices stick to modest intraday gains around the 1.3815 region heading into the European session as traders keenly await the release of the crucial US Personal Consumption Expenditure (PCE) Price Index.
The crucial US inflation report will play a key role in influencing market expectations about the Federal Reserve's (Fed) rate-cut path, which, in turn, will drive the US Dollar (USD) demand and provide a fresh directional impetus to the USD/CAD pair. In the meantime, some repositioning trade assists the USD to attract some dip-buyers following Thursday's dramatic turnaround. Apart from this, weaker Crude Oil prices undermine the commodity-linked Loonie and act as a tailwind for the currency pair.
Any meaningful USD appreciation, however, still seems elusive in the wake of concerns about the worsening US fiscal situation. Furthermore, traders have been pricing in the possibility that the Federal Reserve (Fed) will lower borrowing costs further this year, which might hold back the USD bulls from placing aggressive bets. Adding to this, diminishing odds for a Bank of Canada (BoC) interest rate cut in June could support the Canadian Dollar (CAD) and also contribute to capping the USD/CAD pair.
Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and positioning for an extension of the recent bounce from sub-1.3700 levels, or the year-to-date low touched on Monday. Nevertheless, the USD/CAD pair remains on track to register modest weekly gains, though the fundamental backdrop warrants some caution for bullish traders.
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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