Canadian Dollar continues to ride Greenback weakness to new highs
- The Canadian Dollar found more gains off the back of US Dollar selling pressure.
- A lack of meaningful Canadian economic data means Loonie gains are at the mercy of market flows.
- Middle East geopolitical tensions are back on the rise, keeping risk appetite under wraps but boosting Crude Oil prices.
The Canadian Dollar (CAD) caught yet another bid on Friday, climbing into new eight-month highs as the US Dollar (USD) holds in place and Crude Oil prices surge. Geopolitical tensions are back on the rise after Israel launched a surprise attack on Iranian nuclear facilities late Thursday, pushing investors off their risk-on perch, albeit slightly. US consumer sentiment figures rebounded strongly last month, further limiting downside momentum in general investor sentiment.
Meaningful Canadian data remains limited on the economic docket through the next couple of weeks. Loonie traders will be cautious heading into key Canadian inflation figures due at the end of the month; however, the data vacuum between now and then leaves the Loonie entirely at the mercy of how markets feel about the Greenback znd Middle East tensions from one day to the next.
Daily digest market movers: Canadian Dollar steps higher, bolstered by Crude Oil play
- The Canadian Dollar caught a boost from knock-on market effects, getting pushed higher by rising Crude Oil prices following Israel’s airstrike on Iranian nuclear facilities.
- The ripple effects sent the USD/CAD pair back below the 1.3600 handle for the first time since last October, keeping the Greenback pinned to eight-month lows against the Loonie.
- University of Michigan US Consumer Sentiment Index figures for May rebounded stronger than median market forecasts predicted.
- Consumer perception of economic factors, especially negative ones, routinely overshoot reality, and frequently run out of steam before negative effects can truly be felt in the broader economy. Generalized negative perceptions of the Trump administration’s tariff “policies” are likely no different.
- Another Federal Reserve (Fed) rate call is due next week, but is widely expected to result in another hold on interest rates as policymakers at the Fed remain leery of downside shocks from Donald Trump’s whiplash tariffs.
- Another rate hold is likely to draw more criticism from the White House, but markets have already priced in the next rate cut in September.
Canadian Dollar forecast
The Canadian Dollar continues to gain ground against the Greenback, owing more to external factors rather than any intrinsic strength. USD/CAD continues to run on the low side of declining trendlines from multi-decade highs posted at the start of the year, though one-sided momentum could be poised for a correction move with technical oscillators buried deep in oversold territory.
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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