Canadian Dollar weakens as traders brace for US Retail Sales data

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The USD/CAD pair recovers some lost ground to around 1.4045, snapping the seven-day losing streak during the early European session on Thursday. Markets turn cautious amid heightened tensions in the Middle East and ahead of the US June Retail Sales data later on Thursday.

USD/CAD rebounds to near 1.4045 in Thursday’s early European session.
The US hits an Iranian oil tanker aimed at degrading its ability to target vessels in the Strait of Hormuz.
BoC held the key interest rate at 2.25% at the July policy meeting on Wednesday.

The US Central Command (CENTCOM) said that it launched another wave of strikes on Iran, with Iranian media reporting explosions on Qeshm Island, Bandar Abbas, and Chabahar. US President Donald Trump is also weighing options to expand the US military operation, per CNN.

Meanwhile, the Iranian military said that it carried out retaliatory attacks targeting US assets in Kuwait, Bahrain and Jordan. Signs of escalating tensions in the Middle East could boost a safe-haven currency such as the US Dollar (USD) against the Canadian Dollar (CAD) in the near term.

A softer-than-expected US Producer Price Index (PPI) suggested that US inflation is cooling, reinforcing the Federal Reserve (Fed) to keep key interest rates on hold. Traders will take more cues from US Retail sales data later in the day for further signs of whether the economy is slowing enough to keep inflation under control without tipping into a meaningful downturn.

On Wednesday, the Bank of Canada (BoC) left its benchmark overnight rate unchanged at 2.25% on Wednesday, as widely expected. The decision marked the sixth policy meeting in a row that the Canadian central bank has kept its key policy rate unchanged after an aggressive easing cycle last year.

BoC Governor Tiff Macklem said that "after stalling over the past year, economic growth looks to have resumed in Canada. While U.S. trade policy continues to be a headwind, consumers have been resilient and businesses are adapting.”

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.