USD/CAD bounces up from seven-month lows and approaches a previous support at 1.3760
- The US Dollar trims some losses, approaching a previous support at the 1.3750-1.3765 area
- Investors’ concerns about US debt are likely to weigh on the Dollar’s recovery attempts
- Later today, the US Durable Goods Orders and Consumer Confidence data might determine the US Dollar’s direction.
The US Dollar is showing marginal gains ahead of Tuesday’s European session opening. The USD/CAD is returning from the seven-month low hit on Monday, and nearing a previous support area in the 1.3750-1.3765 range, where bulls are likely to be challenged.
The Greenback lost 1.75% against the Canadian Dollar last week, with investors selling US assets afterMoody’s downgrade of the US debt rating and growing concerns about the impact of Trump’s sweeping tax bill on the US fiscal stability.
US debt concerns are weighing on the Dollar
Trump’s tax-slashing bill, which will be discussed at the US Senate during the next weeks, is expected to boost US debt by $3.8 trillion in the next 10 years, as figures by the US Congressional Budget Office show.
The Canadian Dollar is a tad softer on Tuesday, with Oil prices retreating from last week’s highs. In the absence of relevant macroeconomic releases, the mild retreat in crude prices and market expectations that the BoC will cut rates again after next month’s meeting are likely to undermine speculative demand for the CAD.
Later today, investors will be attentive to the US Durable Goods Orders and the Conference Board’s Consumer Confidence data. These figures will provide further clues about the impact of Trump’s erratic trade policies on manufacturing and consumption.
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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