Canadian Dollar momentum fizzles, Loonie digs in after recent gains
- The Canadian Dollar is holding steady following fresh highs against the US Dollar.
- Canadian economic data is strictly low tier this week; inflation and trade data to rule the roost.
- Market sentiment to hinge on US-China trade talks, CPI inflation, and consumer inflation expectations.
The Canadian Dollar (CAD) is taking a breather following a fresh push into eight-month highs against the US Dollar (USD) last week. The Loonie has gained ground or held steady against the Greenback for all but four of the last 15 consecutive sessions, and the latest rate hold by the Bank of Canada (BoC) snapped a seven-straight rate cut streak, giving CAD bidders fresh legs to stand on.
Canadian markets now face a long week full of trade war headlines and key US economic data. After the US and China spent two weeks going to loggerheads over trade, the Trump administration and delegates from Xi Jinping’s Chinese government are currently hashing out trade details in London.
Investors are overwhelmingly hoping that US President Donald Trump will once again find a reason to pull back from his own tariff and trade restriction threats dressed up as proclamations. On the data front, price impact from the opening volleys of Trump’s import taxes announced at the beginning of the second quarter are expected to begin leaking into headline inflation data, just as consumer inflation expectations are beginning to cool.
Daily digest market movers: Loonie holds onto gains as trade talks dominate
- Following the BoC’s first rate hold after seven straight cuts, CAD markets are staring down the barrel of a thin week on the economic data docket.
- USD market flows will continue to dominate as geopolitical headlines on trade leak through US-China trade talks and US inflation data looms large in the week ahead.
- US CPI inflation is expected to begin climbing as Trump’s tariffs begin to impact headline inflation data.
- Consumer inflation expectations may be tempering according to survey data from the Federal Reserve (Fed) Bank of New York.
- Investors will wait for University of Michigan (UoM) Consumer Inflation Expectations survey results that will come at the end of the week.
Canadian Dollar price forecast
The Canadian Dollar is holding steady near eight-month peaks against the Greenback. The US Dollar’s recent weakness has paired well with interest rate holds from the BoC, helping to keep the USD/CAD pair capped below the 1.3700 handle.
A firm downward trend from February’s highs is well in place. However, technical oscillators are pinned firmly in oversold territory, and while the snap may not be enough to break the prevailing trend, it could be a sign that an exhaustion pullback is brewing.
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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