- Firmer crude oil prices provide support to the Canadian Dollar.
- The US Dollar sheds some ground after posting solid gains at the end of the previous week.
- USD/CAD is technically neutral according to the daily chart, needs to break through 1.3610/20 area.
The FX board is all about the US Dollar (USD) giving up some of the gains achieved last week. The USD/CAD trades around 1.3585 in the American afternoon, bouncing modestly from an intraday low of 1.3570. Meanwhile, the Canadian Dollar (CAD) found near-term support in crude oil prices, as West Texas Intermediate (WTI) prices were up on Monday after the United States Energy Information Administration (EIA)increased its forecast prices for crude oil and petroleum products for the remainder of 2024 while reducing global production forecast in the second half of the year as a response to OPEC+ cuts. The black gold trades above $81.60 a barrel, up around $1 on the day.
Data-wise, Canada’s macroeconomic calendar has little to offer this week. The country will release the monthly Gross Domestic Product (GDP), which is expected to be confirmed at 0.4% MoM in January next Thursday. The report has a limited impact on CAD amid the delay between the period estimate and the actual release.
USD/CAD Technical Outlook
The daily chart for the USD/CAD pair shows a strong static resistance area between 1.3610 and 1.3620, as the area rejected advances multiple times since late February. The overall stance is neutral, as in the mentioned time frame, technical indicators head nowhere around or above their midlines. At the same time, the price currently develops above a bullish 20 DMA, which advances beyond the longer ones, all below the current level. A break through the mentioned resistance should favor an extension towards 1.3700, while the near-term risk will skew to the downside once below 1.3550, with the scope then to test the 1.3500 mark.
Canadian Dollar FAQs
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.
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.
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.
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.
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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