Canadian dollar softens in warm months

VaselineAugust 12, 2024

0 4 minutes read

The Canadian dollar was light to start trading on Monday.
Canada is severely underrepresented on the economic calendar this week.
Updates on US inflation data are key to weekly market sentiment.

The Canadian dollar (CAD) struggled to find direction on Monday, weakening against most of its major peers and the greenback on the charts. The CAD is holding steady at the top end of a swing high against the USD, but markets are rallying in the mid-range as investors await the latest batch of US inflation figures due mid-week.

Canada is strictly low on the economic calendar this week, leaving the Canadian dollar at the mercy of general market sentiment. Investors are still grappling with how the upcoming Federal Reserve (Fed) interest rate call in September will shake out, but rates markets are firmly on expectations of at least a quarter-point cut on September 18.

Daily Market Reasons: Approaching CPI prints leave markets stuck in mid-range

Canadian building permits fell again in June, printing -13.9% on the month and adding to the revised -12.7% contraction from the previous month. Market impact is generally limited due to low housing data two months ago and CAD flows remain subdued.
The Fed’s one-year inflation expectations fell on Monday, falling to 2.97% from 3.02% previously.
Rate markets relaxed on bets of a double rate cut in September, according to CME’s FedWatch tool. Rate traders now see less than 50% on a 50bps cut on September 18, down from last week’s 70%.
Despite bets on a double cut cooling off, rate markets are still pricing in 100% rates on at least a 25bps cut from the Fed in September.
Key midweek US inflation data could throw a spanner in the works if price pressures pick up again.
US producer price index (PPI) inflation falls on Tuesday and US consumer price index (CPI) inflation is set for Wednesday. Both values are expected to be lower.

Canadian Dollar Price Forecast: Steady Gains Lead to Midranges

The Canadian dollar (CAD) underperformed on Monday, falling against most of its major currencies but finding slim gains against the Japanese yen and Swiss franc. CAD was back a quarter of a percent ahead of rebounding antipodes and struggled to find direction against the greenback and the European bloc, trading down a fifth of one percent against the euro and sterling.

USD/CAD price action has stalled as offers face the 50-day exponential moving average (EMA) at 1.3730. The greenback’s early-last-week rally failed to capture the 1.3950 level, giving the Canadian dollar a chance to recover recently lost ground.

Technical pressures are holding bids above the 200-day EMA at 1.3625, but CAD’s bullish momentum could evaporate at any moment, leading USD/CAD back to the upper level.

USD/CAD Daily Chart

Canadian Dollar FAQ

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 and imports this one. Other factors include market sentiment – whether investors are taking riskier assets (risk-on) or seeking safe havens (risk-off) – with risk-on being positive for CAD. 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 significant influence on the Canadian dollar by setting the level of interest rates at which banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main goal is to keep 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 lending conditions, the former being negative CAD and the latter positive CAD.

The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. In general, if the price of oil rises and the CAD rises, as the aggregate demand for the currency rises. The opposite is true if the price of oil falls. Higher oil prices also tend to result in a higher probability of a positive trade balance, which also supports the CAD.

While inflation has always traditionally been considered a negative factor for a currency because it decreases 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 prompt central banks to raise interest rates, which draws more capital inflows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.

Macroeconomic data highlights the health of the economy and can impact the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment surveys and consumer sentiment 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, it can encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

VaselineAugust 12, 2024

0 4 minutes read