USD/CAD moves away from one-week low, retakes 1.4300 ahead of US/Canadian jobs reports

Haresh Menghani FXStreet

USD/CAD attracts some buyers and snaps a three-day losing streak to over a one-week trough.
Bearish Oil prices undermine the Loonie and support the pair amid some repositioning trade.
Traders now look forward to employment details from the US and Canada for a fresh impetus.

The USD/CAD pair builds on the overnight bounce from the 1.4240-1.4235 region, or a one-and-half-week low, and gains some positive traction during the Asian session on Friday. This marks the first day of a positive move in the previous three and lifts spot prices back above the 1.4300 round figure in the last hour.

Bearish Crude Oil prices undermine the commodity-linked Loonie and act as a tailwind for the USD/CAD pair. Apart from this, the uptick could be attributed to some repositioning trade ahead of the crucial employment details from the US and Canada, due later during the North American session. Any meaningful appreciating move, however, still seems elusive amid sustained US Dollar (USD) selling bias.

Worries that US President Donald Trump's trade tariffs could slow the US economic growth in the long run and force the Federal Reserve (Fed) to cut interest rates several times this year dragged the buck to its lowest level since early November on Thursday. Moreover, investors remain uncertain about Trump's trade policies, especially after another U-turn on the recently imposed tariffs on Mexico and Canada.

Trump on Thursday exempted goods from both Canada and Mexico that comply with the US–Mexico–Canada Agreement for a month from the steep 25% tariffs that he had imposed earlier this week. This helps ease trade war fears, which, along with bets the Bank of Canada (BoC) will pause rate cuts at its upcoming meeting later this month, could support the Canadian Dollar (CAD) and cap the USD/CAD pair.

Traders might also opt to wait for the release of the closely-watched US Nonfarm Payrolls (NFP) report, which will play a key role in influencing the near-term USD price dynamics. Apart from this, Canadian jobs data should provide some meaningful impetus to the USD/CAD pair. Nevertheless, spot prices remain on track to register weekly losses, and the fundamental backdrop warrants caution for bullish traders.

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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