Canadian Dollar extends gains as Greenback falters

The Canadian Dollar found further gains on Tuesday as the US Dollar sinks.
Canadian CPI inflation came in moderately near expectations in August.
Inflation figures have left the door open to a BoC rate cut this week.

Joshua Gibson FXStreet

The Canadian Dollar (CAD) stepped into a second straight day of firm gains against the US Dollar (USD) on Tuesday. Global markets are positioning themselves ahead of the Federal Reserve’s (Fed) upcoming interest rate decision on Wednesday, which is broadly expected to kick off a fresh rate-cutting cycle.

Canadian Consumer Price Index (CPI) inflation figures from August came in generally around expectations, paving the way for a fresh interest rate cut from the Bank of Canada (BoC). The BoC will be making its own interest rate decision on Wednesday, just ahead of the Fed.

Daily digest market movers: Canadian Dollar continues to climb over pummeled Greenback

The Canadian Dollar gained another three-tenths of one percent against the US Dollar on Tuesday.
USD/CAD has tumbled back into August’s lows near 1.3740.
Canadian headline CPI inflation clocked in at 1.9% YoY in August, up slightly from the previous 1.7% but not enough to deter expectations of a BoC rate cut on Wednesday.
The Fed is also expected to trim interest rates on Wednesday, with the overwhelming majority of traders expecting the first of three straight quarter-point cuts this week.
The BoC is likewise expected to cut this week, with slimmer odds of a follow-up cut in either October or December.

Canadian Dollar price forecast

A fresh bullish push for the Loonie, sparked more by renewed US Dollar selling than any fundamental strength behind the Canadian Dollar. USD/CAD is back into a familiar technical support zone after chalking in a sharp rejection of the 200-day Exponential Moving Average (EMA), and chart pattern watchers should keep their heads down through the midweek as volatility shakes out near-term patterns.

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.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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