USD/CAD holds above 100-day SMA; looks to build on strength beyond 1.3800
- USD/CAD regains some positive traction on Tuesday, though it lacks bullish conviction.
- Bearish Crude Oil prices undermine the Loonie and support the pair amid a USD uptick.
- Traders opt to wait for more cues about the Fed’s rate-cut path before placing fresh bets.
The USD/CAD pair climbs back above the 1.3800 mark during the Asian session on Tuesday, though it lacks bullish conviction and remains below an over two-week high touched the previous day. Moreover, a combination of diverging forces might hold back traders from positioning for any meaningful appreciating move for spot prices.
Crude Oil prices meet with a fresh supply amid the optimism over planned three-way peace talks between Russia, Ukraine, and the US, which could lead to an end to sanctions on Russian crude. This, along with persistent trade-related uncertainty and the Bank of Canada's (BoC) dovish tilt, undermines the commodity-linked Loonie. Apart from this, a modest US Dollar (USD) uptick acts as a tailwind for the USD/CAD pair.
In fact, US President Donald Trump raised tariffs on Canadian goods from 25% to 35%. Moreover, the White House announced a 40% transshipment tariff on goods rerouted through third countries to avoid the duties. Adding to this, the BoC left the door open for further interest rate cuts in the coming months. This, in turn, is seen weighing on the Canadian Dollar (CAD) and offering some support to the USD/CAD pair.
Meanwhile, any meaningful USD upside seems elusive amid the growing acceptance that the US Federal Reserve (Fed) will resume its rate-cutting cycle in September. Traders also seem reluctant and opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain on the FOMC meeting Minutes, due for release on Wednesday, and Fed Chair Jerome Powell's speech at the Jackson Hole Symposium.
The aforementioned fundamental backdrop makes it prudent to wait for strong follow-through before placing fresh bullish bets around the USD/CAD pair. That said, the emergence of some dip-buying on Tuesday and acceptance above the 100-day Simple Moving Average (SMA) backs the case for some meaningful upside for spot prices. Hence, any corrective pullback could be seen as a buying opportunity and remain limited.
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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