USD/CAD hangs near multi-week low, flirts with 1.3700 mark ahead of US macro data

USD/CAD struggles to capitalize on the previous day’s modest bounce from a multi-week low.
Dovish Fed expectations and a positive risk tone weigh on the USD, capping gains for the pair.
An uptick in Crude Oil prices underpins the Loonie and contributes to the modest downtick.

Haresh Menghani FXStreet

The USD/CAD pair struggles to capitalize on the previous day's late bounce from a four-week low and attracts some intraday sellers near the 1.3725 region on Thursday. Spot prices, however, manage to defend the 1.3700 mark through the early part of the European session as traders now look to the US macro data for a fresh impetus.

The US monthly Retail Sales, along with the usual Weekly Initial Jobless Claims, followed by the Empire State Manufacturing Index and the Philly Fed Manufacturing Index will be published later during the early North American session. This, along with speeches by influential FOM members, will play a key role in driving demand for the US Dollar (USD) and produce short-term trading opportunities around the USD/CAD pair.

In the meantime, expectations for an imminent start of the Federal Reserve's (Fed) rate-cutting cycle, bolstered by signs of cooling inflationary pressures, keep the USD bulls on the defensive. Furthermore, a generally positive tone around the equity markets further undermines the safe-haven buck. Apart from this, an uptick in Crude Oil prices lends support to the commodity-linked Loonie and exerts some pressure on the USD/CAD pair.

Against the backdrop of worries about a wider Middle East conflict, hopes that rate cuts in the US will boost economic activity, and fuel consumption act as a tailwind for the black liquid. That said, concerns about slower global demand might curb gains for the commodity. Apart from this, bets for another 25-bps rate cut by the Bank of Canada (BoC) in September might cap the Canadian Dollar (CAD) and limit losses for the USD/CAD pair.

From a technical perspective, this week's breakdown through the 50-day Simple Moving Average (SMA) suggests that the path of least resistance for spot prices is to the downside. Sustained weakness and acceptance below the 1.3700 mark will reaffirm the negative bias, which should pave the way for an extension of the USD/CAD pair's sharp pullback from the 1.3945 area, or the highest level since October 2022 touched earlier this month.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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