Canadian Dollar makes modest gains after Oil price jacks higher on supply fears
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Canadian Dollar trades slightly higher supported by a rise in Oil prices on supply fears.
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Canadian Manufacturing PMI comes out lower than expected in June though the response from price action is limited.
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Traders are in two minds about the outlook for monetary policy from the Bank of Canada as GDP continues to grow but inflation falls.
Canadian Dollar rises versus the US Dollar on Tuesday during the US session on the back of higher Oil prices, Canada’s largest export, amidst fears of supply cuts by Saudi Arabia and Russia.
The Canadian Manufacturing PMI data release on Tuesday, came out lower than expected and continues to show contraction in the sector, but the data had a limited impact on the Loonie's exchange rate.
USD/CAD is trading in the lower 1.32s on Tuesday during the US session.
Canadian Dollar news and market movers
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The Canadian Dollar is trading up by about 0.25% due to rising Oil prices. Whilst a muted outlook for global growth had weighed on Oil prices, fears of supply cuts by Saudi Arabia and Russia outweighed them.
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The Bank of Canada (BoC) hiked rates by 0.25%, raising its Policy Interest Rate to 4.75% at its last meeting after a five-month pause. In its statement, the BoC gave increased consumer spending and higher-than-expected economic growth as the primary causes.
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Canadian GDP in May rose by 0.4% after the economy flatlined in April, increasing expectations of more BoC rate hikes.
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Core Inflation in May, however, fell to a lower-than-expected 3.7% versus the 3.9% forecast and 4.1% previous, reducing expectations the BoC will hike interest rates at its July 12 meeting.
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The BoC’s inflation target is between 1-3%, so with Core inflation at 3.7%, it is not now as far off the upper threshold as previously.
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The S&P Global Manufacturing PMI survey for June came out at 48.8, which was below the 49.6 forecast and the 49 previously. Despite the lower result, USD/CAD was little affected.
Canadian Dollar Technical Analysis: USD/CAD could reverse in line with longer-term uptrend
USD/CAD is in a long-term uptrend on the weekly chart since the 2021 lows. It has been consolidating in a broad sideways range since October 2022 and currently sits at the bottom of that range. Given that the trend has a tendency to extend the probability, therefore, favors longs over shorts.
The USD/CAD appears to have completed a measured move price pattern since the March 2023 highs. The measured move is a 3-wave zig-zag-like price pattern, much like an ABC correction in which the first and third waves are of a similar length (waves A and C on the chart below).
The measured move that has formed on USD/CAD looks like it has probably completed since waves A and C are of almost the same length. If so, it suggests the price has probably bottomed and is about to begin a cycle higher.
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US Dollar vs Canadian Dollar: Weekly Chart
There is also a confluence of support just under the June lows in the late 1.30s, made up of several longer moving averages and a major trendline. This is likely to underpin price at this level and reduces the chances of a breakdown. Only a decisive break below 1.3050 would provide evidence this thick band of weighty support has been definitively broken. A decisive bearish break is one that is accompanied by a longer-than-average red candlestick or three red candlesticks in a row.
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US Dollar vs Canadian Dollar: Daily Chart
The daily chart further suggests the potential for a bullish recovery. The move up from the June 27 bottom has been accompanied by strong momentum, as shown by the high reading on the Relative Strength Index (RSI) momentum indicator, which is higher than it was when prices were more elevated prior to the market bottom.
A decisive break above the 1.3270 key lower high would provide evidence of a short-term reversal. This move would likely see a rise up to possibly as high as 1.3400 and the 50-day Simple Moving Average. This would also see the short-term trend rise in line with the longer-term uptrend.
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.
Author
Joaquin Monfort
FXStreet
Joaquin Monfort is a financial writer and analyst with over 10 years experience writing about financial markets and alt data. He holds a degree in Anthropology from London University and a Diploma in Technical analysis.
