USD/CAD picks up to 1.3850, remains wavering within previous ranges
- The US Dollar appreciates moderately on Wednesday but remains trapped between 1.3820 and 1.3870.
- The market, so far, is shrugging off Trump's threats to the Federal Reserve's independence.
- Oil prices' 2.5% depreciation from Monday's highs is adding pressure on the commodity-sensitive CAD.
The US Dollar is posting moderate gains against the Loonie on Wednesday. Still, it remains trapped within the weekly range, roughly between 1.3820 and 1.3870, with all eyes on the standoff between US President Donald Trump and the Federal Reserve.
Investors, so far, are shrugging off concerns about the consequences of the unprecedented attempts by a US president to influence the central bank’s decisions. The market might be awaiting developments on Governor Cook´s lawsuit over Trump’s attempts to fire her.
Upbeat US data, low Crude prices support the Greenback
On the macroeconomic front, US data released on Tuesday showed better-than-expected Durable Goods Orders in July, indicating resilient industrial activity. Somewhat later, the Conference Board’s Consumer Sentiment Index deteriorated less than expected, which provided some support to the US Dollar.
Also on Tuesday, the Governor of the Bank of Canada, Tiff Macklem, called for more flexibility in the rate-setting framework to respond to the changes in the global economic context and dismissed a revision of the 2% inflation target.
Crude Oil, Canada’s main export, remains depressed despite Trump’s threats to Russia for pushing back peace talks with Ukraine. The US benchmark WTI has depreciated more than 2.5% from Monday’s highs, returning to levels below $63.00, adding bearish pressure on the Canadian Dollar.
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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