USD/CAD holds above 100-day SMA; looks to build on strength beyond 1.3800

USD/CAD regains some positive traction on Tuesday, though it lacks bullish conviction.
Bearish Crude Oil prices undermine the Loonie and support the pair amid a USD uptick.
Traders opt to wait for more cues about the Fed’s rate-cut path before placing fresh bets.

Haresh Menghani FXStreet

The USD/CAD pair climbs back above the 1.3800 mark during the Asian session on Tuesday, though it lacks bullish conviction and remains below an over two-week high touched the previous day. Moreover, a combination of diverging forces might hold back traders from positioning for any meaningful appreciating move for spot prices.

Crude Oil prices meet with a fresh supply amid the optimism over planned three-way peace talks between Russia, Ukraine, and the US, which could lead to an end to sanctions on Russian crude. This, along with persistent trade-related uncertainty and the Bank of Canada's (BoC) dovish tilt, undermines the commodity-linked Loonie. Apart from this, a modest US Dollar (USD) uptick acts as a tailwind for the USD/CAD pair.

In fact, US President Donald Trump raised tariffs on Canadian goods from 25% to 35%. Moreover, the White House announced a 40% transshipment tariff on goods rerouted through third countries to avoid the duties. Adding to this, the BoC left the door open for further interest rate cuts in the coming months. This, in turn, is seen weighing on the Canadian Dollar (CAD) and offering some support to the USD/CAD pair.

Meanwhile, any meaningful USD upside seems elusive amid the growing acceptance that the US Federal Reserve (Fed) will resume its rate-cutting cycle in September. Traders also seem reluctant and opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain on the FOMC meeting Minutes, due for release on Wednesday, and Fed Chair Jerome Powell's speech at the Jackson Hole Symposium.

The aforementioned fundamental backdrop makes it prudent to wait for strong follow-through before placing fresh bullish bets around the USD/CAD pair. That said, the emergence of some dip-buying on Tuesday and acceptance above the 100-day Simple Moving Average (SMA) backs the case for some meaningful upside for spot prices. Hence, any corrective pullback could be seen as a buying opportunity and remain limited.

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.

GBP/USD trims gains; back to 1.3450-ish

The persistent weakness hurting the Greenback lends support to the British Pound and the rest of the risk-linked assets, sending GBP/USD to new two-day tops past 1.3480 on Wednesday. Indeed, Cable advances for the second day in a row helped by the constant optimism around a potential US-Iran deal.

EUR/USD clings to gains near 1.1550

EUR/USD builds on Tuesday’s advance and confronts the area of multi-week highs in the 1.1550-1.1560 band on Wednesday. The continuation of the pair’s recovery comes once again on the back of the renewed selling pressure on the US Dollar, always in response to diminishing geopolitical tensions.

How Wall Street rigs the game [Video]

In this week’s Live from the Vault, Andrew Maguire is joined by Peter Antico and Sean Stone to discuss the Paradigm of Money - an in-depth expose of financial market corruption, from naked shorting to the two-tier system that protects Wall Street.

Crypto Today: Bitcoin, Ethereum advance while XRP lags amid US-Iran deal optimism

Bitcoin (BTC) hovers near $64,000 at the time of writing on Wednesday, buoyed by a marginal improvement in crypto sentiment amid growing optimism that the United States (US) and Iran could potentially reach an agreement to open the Strait of Hormuz this week. Ethereum (ETH) mirrors Bitcoin’s neutral-to-bullish outlook, trading toward $1,900.

Taking out the lines in the sand

Good Day... And a Wonderful Wednesday to you! Well, just as I suspected, my beloved Cardinals' bats went silent last night in the Bronx, and they lost 0-2... The Yankees' bats were exactly a murderer's row, but they hit 2 homers and won. I said yesterday that the song : Just Once In My Life, could be the Cardinals' song after hitting 5 home runs the previous night!

9-3: Is the Federal Reserve’s vote tally Warsh's new forward guidance?

The rate did not move. Neither did the statement, and that’s the more interesting fact. Set the July 29 Federal Open Market Committee (FOMC) statement beside the one issued on June 17, and the two documents are identical apart from a single verb and a paragraph at the bottom naming three dissenters.