USD/CAD flat lines around mid-1.4000s; downside potential seems limited
- USD/CAD is seen consolidating in a narrow range amid mixed fundamental cues.
- Softer Canadian CPI print and a downtick in Crude Oil prices undermine the Loonie.
- Economic concerns cap USD and the pair, though less dovish Fed bets favor bulls.
The USD/CAD pair struggles to capitalize on the previous day's positive move to a one-and-a-half-week high and oscillates in a narrow range during the Asian session on Tuesday. Spot prices currently trade around mid-1.4000s, nearly unchanged for the day, though the supportive fundamental backdrop favors bullish traders.
The Canadian Dollar (USD) continues to be undermined by data released on Monday, which pointed to signs of easing domestic inflation pressures. In fact, Canada's headline Consumer Price Index (CPI) decelerated from 2.4% YoY to 2.2% in October. The reading, however, was slightly above the 2.1% expected. Apart from this, a softer tone surrounding Crude Oil prices is seen weighing on the commodity-linked Loonie and acting as a tailwind for the USD/CAD pair.
The US Dollar (USD), on the other hand, is seen consolidating the previous day's strong move up and remains well supported by less dovish Federal Reserve (Fed) expectations. Several Fed officials recently signaled caution on further monetary easing amid the lack of economic data, forcing investors to scale back their bets for a rate cut in December. This, along with the prevalent risk-off environment, benefits the safe-haven buck, lending some support to the USD/CAD pair.
The USD bulls, however, seem reluctant amid concerns about the weakening economic momentum on the back of the longest-ever US government shutdown. Moreover, traders opt to wait for the FOMC Minutes, due on Wednesday, and the delayed US Nonfarm Payrolls (NFP) report for October on Thursday for more cues about the Fed's rate-cut path. This, in turn, will play a key role in influencing the USD price dynamics and provide a fresh impetus to the USD/CAD pair.
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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