Canadian Dollar extends gains as risk-on flows rebound

Daily digest market movers: CAD catches a bid on thin Greenback markets

The Canadian Dollar rose around one-third of one percent against the US Dollar on Wednesday.
As the USD/CAD pair eases back from recent highs, price action could be poised for a technical bounce from the 50-day Exponential Moving Average (EMA); traders should watch out for any immediate reversals.
Canadian GDP growth figures are expected to show a 0.6% contraction in Q2.
Before that, Loonie traders will need to escape another US GDP print unscathed on Thursday.
Friday will poise a complex intraday problem for CAD traders: on top of Canadain growth data, markets will be faced with the simultaneous release of the latest US PCE inflation figures from July.
Core US PCE inflation is expected to tick upwards on a yearly basis as tariff-led inflation continues to bleed through into headline inflation data.

Canadian Dollar price forecast

The Canadian Dollar has clawed back over a full percent against the US Dollar after hitting a 13-week low last Friday. USD/CAD has chalked in a bearish rejection of the 200-day EMA near 1.3880, while the 50-day EMA is providing an immediate technical floor from 1.3777. The pair’s higher-lows pattern remains intact, though a drop through 1.3750 will put USD/CAD back on track to revisit the 1.3600 handle.

USD/CAD daily chart

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.

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