USD/CAD steadies above 1.3640 ahead of US ADP employment data
- The US Dollar posts minor losses, supported by strong US Jobs and manufacturing data.
- The low Crude prices are putting pressure on the Canadian Dollar.
- Later today, the US ADP report is likely to determine the US Dollar's near-term direction.
The US Dollar maintains a moderately positive tone against the Canadian Dollar on Wednesday, favoured by strong US job openings and manufacturing data seen on Tuesday, with all eyes on the US ADP employment report, due later on Wednesday.
The USD/CAD bounced up from two-week lows right below 1.3600 following US data and Powell’s cautious comments at an ECB forum in Portugal, and is consolidating above 1.3640, favoured by a mild appetite for risk during Wednesday’s European session.
US data released on Tuesday showed a higher.-htan-expected increase on job openings in May, and manufacturing activity improving beyond expectations, with production expanding for the first time in four months and price inflation accelerating.
While macroeconomic data has been USD supportive this week, the Canadian Dollar remains weighed by lower prices for Oil, which is Canada´s main export. The US benchmark WTI remains pinned near $65.00 amid lower geopolitical tensions and with traders bracing for further supply hikes at this week’s OPEC+ meeting.
The highlight today is the US ADP Employment Change report, which is expected to follow the path of Tuesday’s JOLTS reading and show a significant increase in employment creation in June. Another upbeat release will improve investors’ expectations for Friday’s Nonfarm Payrolls Report might give some additional boost to the US 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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