Canadian Dollar gets bolstered by battered Greenback

Daily digest market movers: Canadian Dollar hitches a ride on softening Greenback flows

The Canadian Dollar rose around three-quarters of one percent against the US Dollar on Tuesday, pushing USD/CAD into new half-year lows below 1.3600.
Canadian Prime Minister cautioned US President Donald Trump that although Canada is not actively pursuing a fully-free trade agreement with China, Canada is still dedicated to seeking trade arrangements outside of the US’ influence. PM Carney made the soft threats regarding the US’ hegemony while in Davos, Switzerland. Trade tensions will likely remain high even as Trump pivots to ambiguous comments that Greenland is “progressing”.
Crude Oil markets are on the bullish side on Tuesday, providing further structural support for the Loonie. US West Texas Intermediate (WTI) Crude Oil prices are up 2.5% on Tuesday, taking a multi-week recovery to 13.4% from eight-month lows posted in December.
The Bank of Canada is due with its latest interest rate decision on Wednesday. The BoC is broadly expected to stand pat on interest rates for the time being.
The Federal Reserve (Fed) will deliver its own interest rate call on Wednesday. The Fed is likewise forecast to leave rates unchanged in the 3.5-3.75% range, though investors will be listening intently for signs of a rhetorical shift toward further future rate cuts.

Canadian Dollar price forecast

The Canadian Dollar’s newfound bull run at the hand of a deflating US Dollar has given Loonie bulls plenty to cheer about. The USD has closed flat or lower against the Loonie for all but one of the last seven straight trading days, falling 2.4% top-to-bottom from mid-January.

Momentum indicators are cautioning that there could be room for a bounce or pullback with the Stochastic Oscillator poised to test oversold conditions. Price action north of the 1.3500 handle also faces a cluster of stiff technical support levels, and chart friction should be expected in the near-term.

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.