USD/CAD moves away from two-week low set on Tuesday, retakes 1.4300 ahead of Fed
- USD/CAD attracts buyers for the second straight day, though the upside seems limited.
- A modest USD bounce from a multi-month low is seen lending some support to the pair.
- Any meaningful USD upside, however, seems elusive ahead of the crucial FOMC decision.
The USD/CAD pair is seen building on the overnight bounce from the 1.4260 area, or a nearly two-week low, and gaining some follow-through positive traction for the second straight day on Wednesday. Spot prices climb back above the 1.4300 mark during the Asian session, though the upside seems limited as traders might opt to wait for the outcome of the highly-anticipated FOMC policy meeting.
Market consensus strongly suggests that the Federal Reserve (Fed) will keep the federal funds rate unchanged at the current range of 4.25% to 4.50%. Hence, the focus will be on updated economic projections and the post-meeting press conference, where comments by Fed Chair Jerome Powell will be scrutinized for cues about the future rate-cut path. This, in turn, will play a key role in influencing the US Dollar (USD) price dynamics and provide some meaningful impetus to the USD/CAD pair.
Heading into the key central bank event risk, some repositioning trade assists the USD to recover slightly from its lowest level since October touched on Tuesday. Apart from this, subdued Crude Oil prices, following the previous day's late pullback from over a two-week high, undermine the commodity-linked Loonie and support the USD/CAD pair. However, the risk of a further escalation of tensions in the Middle East, which could impact supply, helps limit the downside for the black liquid.
Furthermore, a surprise jump in Canada's annual inflation rate, to 2.6% in February or the highest in eight months, might hold back traders from placing aggressive bearish bets around the Canadian Dollar (CAD) and cap the USD/CAD pair. However, the fact that spot prices are holding comfortably above the 100-day Simple Moving Average (SMA) warrants some caution before positioning for an extension of the pair's recent downfall witnessed over the past week or so.
Canadian Dollar FAQs
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.
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.
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.
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.
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.
