Canadian Dollar lurches into new highs amid Greenback weakness
- The Canadian Dollar gained fresh ground against the US Dollar on Thursday.
- Softer-than-expected US PPI inflation data pushed the Greenback lower as Fed rate cut bets rise.
- Canadian economic data remains limited through the rest of the month.
The Canadian Dollar (CAD) lurched into fresh eight-month highs against the US Dollar (USD) on Thursday, pushing the USD/CAD pair to its lowest levels since last October and testing the 1.3600 region. US Producer Price Index (PPI) inflation figures came in softer than expected in May, pushing out fears of tariff-fueled inflation sparks and pushing investors into firmer bets for a Federal Reserve (Fed) rate cut in September.
Canadian economic figures remain thin on the data docket for the remainder of the month, at least until the latest round of Canadian Consumer Price Index (CPI) inflation figures due on June 24. The Bank of Canada (BoC) recently snapped its seven-straight rate cut trend, holding interest rates flat at 2.75% at its latest rate call. The BoC is not expected to meet again to discuss interest rates until its next policy meeting on July 30, and Loonie traders have some time and a few key datasets before trying to figure out if the BoC has been beaten back from its cut-happy stance.
Daily digest market movers: Canadian Dollar finds fresh highs against swooning Greenback
- The Canadian Dollar surged over one-half of one percent against the US Dollar on Thursday.
- US producer-level inflation came in cooler than expected, bolstering bets of a Fed rate cut.
- According to the CME’s FedWatch Tool, rate traders are pricing in nearly 80% odds of at least a quarter-point cut from the Fed in September.
- Loonie data watchers will be forced to wait until the end of the month for the next batch of meaningful Canadian economic data.
- Key US consumer sentiment figures will wrap up the trading week with the University of Michigan’s Consumer Sentiment Index set to publish on Friday.
Canadian Dollar price forecast
Broad-based US Dollar weakness has bolstered the Canadian Dollar into fresh highs, squeezing the USD/CAD pair down to the 1.3600 handle for the first time in eight months. The pair is following a dedicated downward channel, steadily losing ground after posting multi-decade highs in February near 1.4800.
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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