USD/CAD struggles to regain the 1.4000 level on risk-off markets

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The US Dollar is trimming some losses against its Canadian Counterpart on Wednesday and trades right at the 1.4000 level, after bouncing from lows near 1.3970 on Tuesday.

The US Dollar is trimming losses and attempts to return above 1.4000 against the CAD.
Tuesday's bearish engulfing candle on the daily chart suggests growing negative pressure.
The CAD has been drawing some support from the recovery of Oil prices.

The US Dollar is trimming some losses against its Canadian Counterpart on Wednesday and trades right at the 1.4000 level, after bouncing from lows near 1.3970 on Tuesday. The risk-averse mood is providing some support to the Greenback, but the recovery attempt remains frail so far, following a 0.5% sell-off on Tuesday.

US employment data added to evidence of a stalled labour market, and heightened hopes of a Federal Reserve interest rate cut at its December meeting, which hit the US Dollar across the board. The bearish engulfing candle on the daily chart is a negative sign and strengthens the case for a deeper correction from multi-month highs, near 1.4150.

US data keeps pointing to a weak labour market

The US Labour Department released its first report after the US government shutdown that revealed an increase in Initial Jobless Claims to 232,000, while continuing claims rose to 1,957 million in the week of October 18.

Apart from that, ADP released its Weekly Employment Change report, which showed that US businesses continued laying off workers at an average weekly pace of 2,500 in the four weeks ending on November 1. These figures improve the 11,250 average job losses of the previous week but still hint at a weakening labour market.

The Canadian Dollar, on the other hand, is drawing support from a gradual increase in Crude Prices, Canada’s main import. The US Benchmark WTI is ticking down to levels around $60.25 on Wednesday, but still holds most of the gain taken over the last four trading days, on a rebound from lows near $58.00.

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.