The Canadian dollar falls further as the Canadian trade balance contracts

VaselineOctober 8, 2024

0 4 minutes read

The Canadian dollar falls further as the Canadian trade balance contracts

The Canadian dollar lost another quarter of a percent on Tuesday.
Canada saw a steeper-than-expected contraction in trade balance figures.
Fed meeting minutes to reveal more details on latest Fed rate moves.

The Canadian dollar (CAD) fell another quarter of a percent against the greenback on Tuesday, paring a slide lower against the US dollar for a fifth straight trading day. The CAD has fallen nearly 2% against the greenback since peaking in late September.

Canada’s trade balance contracted more than expected in August, with exports falling and imports only slightly up. US trade balance figures moderated and Fedspeak continues to dominate market flows as investors look for signs of more interest rate cuts.

Daily digest market moves

The CAD lost weight on Tuesday, contracting another 0.25% against the greenback.
Canada’s international merchandise trade fell $1.1 billion in August, much stronger than the -$500 million forecast.
The decline in Canadian merchandise trade was triggered by a deeper reduction in exports, which fell from $65.66 billion to $64.31 billion, compared with a lighter increase in imports to $65.41 billion from to 64.97 billion dollars.
The latest minutes of the Fed meeting are due out on Wednesday as Fedspeak continues to kill hopes of a rate cut.
Read more:
Fed’s Collins: US economy, labor market remain strong
Fed’s Bostic: Jobs market not weak, economy may be too strong for policy recalibration

Canadian Dollar Price Forecast

The USD/CAD daily chart shows a clear upward momentum that has developed in recent trading sessions. The price moved above both the 50-day exponential moving average (EMA) at 1.35880 and the 200-day EMA at 1.36048, which often signals a potential trend reversal or continuation of a bullish trend. A break above these key moving averages is a significant technical indicator that suggests bullish sentiment is building in the market. The price is now hovering around 1.36515, a level that could act as a short-term resistance point.

The MACD (Moving Average Convergence Divergence) at the bottom of the chart is currently showing a bullish crossover. The MACD line (blue) has crossed above the signal line (orange), which is a positive sign for further upward momentum. Additionally, the histogram bars have moved into positive territory, confirming that bullish pressure is building. This could indicate that the market is gaining momentum and further upside is possible if these signals remain intact.

However, caution should be exercised as the price approaches potential resistance areas just above current levels, which could prompt some profit-taking. If the price fails to decisively break above the recent high, it may consolidate around the EMAs or turn to test the support levels in the 1.35880 or 1.36048 areas. Overall, the technical outlook for USD/CAD is currently bullish, but traders should be on the lookout for signs of exhaustion or a break above current resistance for confirmation of further gains.

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 balance of trade, 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, and consumer sentiment surveys can all influence CAD direction. 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.

VaselineOctober 8, 2024

0 4 minutes read