Canadian Dollar in volatile swings as Crude Oil retreats, key technical level met


  • Canadian Dollar trades in volatile ups and downs against the US Dollar after hitting a technical ceiling and a decline in Oil prices.  

  • Oil falls from weaker-than-expected Chinese growth data for Q2 and the reopening of Libya’s largest Oil field. 

  • A thick knot of technical support levels just below 1.3100 further provides a technical foundation for the reversal.

The Canadian Dollar (CAD) trades in volatile ups and downs against the US Dollar (USD) on Monday – weakening initially at a key technical level as it tracks a decline in global Oil prices, Canada’s primary export, but then trading higher. 

The USD/CAD pair trades in the 1.31s during the US session.  

Canadian Dollar news and market movers 

  • The Canadian Dollar starts trading lower against the US Dollar (bullish for USD/CAD) on the back of a fall in global Oil prices. 

  • WTI Crude Oil declined from a peak above $77 a barrel to a low of $73.70 reached on Monday during the Asian session. Crude Oil is Canada’s largest export, so changes in price can impact on the demand and value of the CAD. 

  • The fall in Oil price was put down to an unexpected slowdown in China’s second quarter GDP data and the resumption of Libyan supply after a brief outage, according to Oilprice.com. 

  • Chinese GDP expanded by 6.3% in Q2 on year – below the 7.3% forecast by economists, according to data from the National Bureau of Statistics of China released on Monday morning. 

  • Quarter-on-quarter Chinese GDP rose 0.8%, beating the 0.5% estimate, but lower than the 2.2% of Q1. 

  • Oil prices were further depressed after Libyan production came back online following a brief outage amid protests by the Al-Zawi tribe over the kidnapping of the Libyan Finance Minister, Faraj Bumatari. His release led to the reopening of the Sharara and El Feel Oil fields on Monday, according to an analysis by Oilprice.com. 

  • Several institutional analysts are bearish in the medium-term regarding the Canadian Dollar versus the US Dollar, seeing the pair likely rising to 1.37-38 during H2 of 2023. 

  • Nomura expects rate differentials and greater growth in the US as the main factors driving USD/CAD higher. 

  • For the National Bank of Canada, the negative effect of a global economic slowdown on commodity prices and Oil is the main factor that will drag CAD lower in H2, in a note cited on Poundsterlinglive.com. 

  • After several lower-than-expected inflation releases last week put a damper on the Greenback, the release of the University of Michigan Consumer Sentiment Index on Friday reversed the slide. 

  • US Michigan Consumer Sentiment rose to 72.6 in July according to preliminary data – well above the 65.5 predicted and the 64.4 previous. 

  • This reinvigorated bullish expectations for US growth were overall positive for USD. 

Canadian Dollar Technical Analysis: Bounces on a thick band of support 

USD/CAD is in a long-term uptrend on the weekly chart, which began at the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within that uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities of an eventual continuation higher marginally favor longs over shorts.

USD/CAD appears to have completed a large measured move price pattern that began forming at the March highs. This pattern resembles a 3-wave ABC correction, in which the first and third waves are of a similar length (labeled waves A and C on the chart below). 

US Dollar vs Canadian Dollar: Weekly Chart

A confluence of support situated in the upper 1.3000s, which is made up of several longer moving averages and a major trendline, prevented last week’s decline from extending any lower and provided a foundation for a reversal on both Friday and Monday.  

US Dollar vs Canadian Dollar: Daily Chart

The long green up-bar that formed on Friday is a bullish engulfing Japanese candlestick reversal pattern. Combined with the long red down bar immediately before it also completes a two-bar bullish reversal pattern. If it is followed on Monday by a further bullish green close, the likelihood of a strong reversal and recovery are heightened. Taken together with the probable completion of the measured move pattern, the chances of a reversal higher are further increased.

It will take a decisive break above the 50-day Simple Moving Average (SMA) at circa 1.3400 to refresh the USD/CAD long-term uptrend. Bulls marginally have the upper hand, with the odds slightly favoring a recovery and a continuation higher. 

Only a decisive break below 1.3050 would indicate the thick band of weighty support in the upper 1.30s has been definitively broken, bringing the uptrend into doubt. 

 

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.

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