USD/CAD struggles to register any meaningful recovery and hangs near a multi-week low.
US fiscal concerns cap the post-NFP USD rally and act as a headwind for the currency pair.
Oil prices preserve weekly gains and underpin the Loonie, contributing to capping the pair.
The USD/CAD pair oscillated in a narrow band during the Asian session on Friday and remains close to a nearly three-week low touched the previous day. Spot prices currently trade around the 1.3575 area, nearly unchanged for the day amid mixed cues.
The US Dollar (USD) struggles to capitalize on the previous day's strong move up that followed the release of a stronger-than-expected headline US Nonfarm Payrolls (NFP) report amid US fiscal concerns. US President Donald Trump’s tax-cut and spending bill cleared its final hurdle in Congress on Thursday. The legislation is estimated to add $3.4 trillion to the nation’s debt and to explode the federal deficit. This, in turn, caps the recent USD recovery from a multi-year low and acts as a headwind for the USD/CAD pair.
Meanwhile, Crude Oil prices struggle to lure buyers amid expectations that the OPEC+ will announce an increase of 411,000 barrels per day in production for August. The black liquid, however, manages to preserve weekly gains and underpins the commodity-linked Loonie, contributing to capping the USD/CAD pair. That said, persistent trade-related uncertainties might hold back traders from placing aggressive directional bets heading into the weekend, and relatively thin trading volumes on the back of the US Independence Day holiday.
From a technical perspective, the formation of a descending channel points to a well-established short-term downtrend. This, along with negative oscillators, suggests that the path of least resistance for the USD/CAD pair is to the downside. Bearish traders, however, might wait for a sustained break below the trend-channel support before placing fresh bets and positioning for an extension of the fall witnessed over the past two weeks or so.
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.
Disclaimer: The information provided on this website is for educational and informational purposes only and should not be considered financial or investment advice.
