Canadian Dollar rebounds from two-month lows

USD/CAD pulled back after hitting a two-month high of 1.39613 the previous day.
Market sentiment remains cautious after Israel ordered residents of Tyre, Lebanon, to evacuate ahead of immediate attacks.
Traders expect the Bank of Canada to keep rates unchanged at 2.25% on Wednesday.

Akhtar Faruqui FXStreet

USD/CAD halts its four-day winning streak, pulling back after reaching a two-month high of 1.39613 in the previous day and trading around 1.3940 during the European hours on Tuesday. The pair depreciates as the US Dollar (USD) declines as safe-haven demand eases after Iran and Israel agreed to halt mutual attacks. The de-escalation came after an appeal from US President Donald Trump, boosting hopes that peace negotiations could move forward.

However, traders remain cautious amid uncertainty surrounding the Middle East ceasefire. The Guardian reported cited Israeli army’s Arabic-language spokesperson, Avichay Adraee, who issued a warning for residents of the Lebanese city of Tyre to evacuate immediately ahead of attacks. Adraee wrote, “Urgent warning to the residents of the city of Tyre, including the Christian quarter, and the camps and surrounding neighborhoods to evacuate immediately and move north beyond the Zahrani river.”

Israeli Prime Minister Benjamin Netanyahu stated the war against Iran and its Lebanon-based proxy, Hezbollah, "has not yet ended," though he insisted both entities are weaker than ever. Netanyahu’s remarks followed a statement from Iran’s military confirming it had ceased strikes against Israel.

Recent strong US jobs data have fueled inflation fears and heightened expectations of Federal Reserve rate hikes. According to the CME FedWatch tool, traders have raised the probability of a December quarter-point rate hike to 43%, up from 14% a month ago. Wednesday's US Consumer Price Index (CPI) and Thursday's Producer Price Index (PPI) data will be eyed to gauge the Fed's next move.

Canadian International Merchandise Trade will be eyed later in the day. Focus will be shifted toward the Bank of Canada's (BoC) policy decision on Wednesday, with rates expected to remain unchanged at 2.25%.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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