Canadian Dollar languishes at 14-month lows amid Fed hiking bets, lower Oil prices

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The Canadian Dollar (CAD) consolidates losses on Thursday, as the US Dollar (USD) remains buoyed by heightened hopes that the Federal Reserve (Fed) will tighten its monetary policy later this year.

USD/CAD consolidates at 14-month highs around 1.4240 with technical indicators at extremely overbought levels.
Hopes of Fed hikes keep buoying the US Dollar ahead of the release of the US PCE Price Index report.
A 20% decline in Oil prices in June is hammering speculative demand for the CAD.

The Canadian Dollar (CAD) consolidates losses on Thursday, as the US Dollar (USD) remains buoyed by heightened hopes that the Federal Reserve (Fed) will tighten its monetary policy later this year. The USD/CAD pair broke above 1.4200 earlier in the week, to hit fresh 14-month highs just below 1.4250, although recent price action shows an overstretched rally.

The strong US macroeconomic indicators seen in recent weeks, and especially the stabilisation in the labour market, combined with overshooting inflation, are feeding hopes that the Fed will hike rates in the coming weeks. This, and investors' cautiousness about the US-Iran peace deal, are the main market movers at the moment, and are propelling the US Dollar to mid-term highs against its main peers.

US data scheduled for today is expected to confirm those views. The US Personal Consumption Expenditures (PCE) Price Index figures for May, due later on Thursday, are forecast to advance at a 4.1% yearly pace, the fastest growth in the last three years, up from 3.8% in April.

The Canadian Dollar, on the other hand, has been hammered by June’s 20% decline in Oil prices. Crude is Canada’s main export, and the sharp reversal in prices since the US and Iran reached a ceasefire deal has sent the Loonie tumbling across the board amid expectations that export revenues will decline significantly.

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.