Canadian Dollar drives lower as Loonie races Greenback to the bottom
- The Canadian Dollar shed further weight against the US Dollar on Monday.
- Despite a general easing in Greenback flows, the Loonie crumpled faster.
- Weakening Crude Oil prices and a complicated RMPI print clipped CAD support.
The Canadian Dollar (CAD) weakened once again on Monday, falling against the US Dollar (USD) and closing off potential for a near-term bullish reversal. The Loonie has fallen for three of the last four consecutive sessions against the Greenback, adding another 0.3% to the losses pile and bringing its four-day performance to -0.75% top-to-bottom.
Crude Oil prices continue to struggle near four-month lows, ripping support out from beneath the commodity-tied Canadian Dollar. The latest Raw Material Price Index (RMPI) showed input good prices contracted by 0.6% in August, but stripping out energy prices actually saw raw material prices increase over the month.
Daily digest market movers: Canadian Dollar falters amid middling data and weak oil prices
- The Canadian Dollar shed over one-third of one percent against the US Dollar on Monday.
- Headline Canadian raw materials prices declined 0.6% MoM in August, entirely reversing the expected 1.2% uptick.
- Stripping energy costs out of the RMPI showed that aggregate input costs actually rose 0.9% in August, up 15.5% YoY.
- The only thing keeping Loonie losses under wraps are weak US Dollar flows;
- The economic calendar is tilted heavily toward US data releases this week. US Purchasing Managers Index (PMI) survey results are due on Tuesday, with US Gross Domestic Product (GDP) growth figures on Thursday and key Personal Consumption Expenditures Price Index (PCE) inflation data due on Friday.
Canadian Dollar price forecast
Steepening losses for the Canadian Dollar are beginning to pile up as CAD bulls run out of steam, pushing the Loonie back down from recent highs and chalking in a third straight failure to crack the 1.3740 support zone on the USD/CAD daily candlesticks.
USD/CAD remains capped by the 200-day Exponential Moving Average (EMA) near 1.3865, limiting upside potential for Greenback bidders. However, CAD buyers have fumbled bullish technical setups multiple times in a row, tipping odds in favor of fresh US Dollar strength in the near term.
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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