USD/CAD gathers strength above 1.3750 ahead of US ISM Manufacturing PMI report

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The USD/CAD pair edges higher to near 1.3770 during the early European session on Monday. Nonetheless, a rise in crude oil prices following the United States’ (US) capture of Venezuelan President Nicolas Maduro could lift the commodity-linked Loonie against the US Dollar (USD).

USD/CAD strengthens to around 1.3770 in Monday’s early European session.
The first support level emerges at 1.3745; the immediate resistance level to watch is 1.3877.
Traders brace for the US ISM Manufacturing PMI report.

The US ISM Manufacturing Purchasing Managers Index (PMI) data will be the highlight later on Monday. On Wednesday, the Canadian Ivey PMI report will be published. The figure is expected to slightly improve to 48.3 in December from 48.2 in November. In case of stronger-than-expected US economic data, this could potentially slower pace of interest rate cuts this year, supporting the US Dollar.

Technical Analysis:

In the daily chart, USD/CAD holds a negative outlook as the price is below the gently descending 100-day EMA at 1.3877. Bollinger Bands are narrowing, and price hovers below the upper band at 1.3839, reflecting reduced volatility as upside momentum steadies. RSI stands below the midline near 46.01, indicating bearish momentum in the near term.

On pullbacks, the Bollinger middle band at 1.3745 offers initial support, while the lower band at 1.3649 underpins the downside. Trend conditions would improve with a sustained move back above the 100-day EMA, while a failure to hold the midline would put the lower band in focus.

(The technical analysis of this story was written with the help of an AI tool)

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.