USD/CAD trades with positive bias above mid-1.3900s; upside potential seems limited

USD/CAD stages a modest bounce from the vicinity of a one-month trough set last week.
A modest USD uptick supports spot prices, though a combination of factors caps gains.
The divergent Fed-BoC policy outlooks and an uptick in Crude Oil prices act as a headwind.

Haresh Menghani FXStreet

The USD/CAD pair attracts some buyers during the Asian session on Thursday, and for now, seems to have snapped a two-day losing streak back closer to the 1.3940-1.3935 region, or a nearly one-month low, touched last week. Spot prices, however, lack bullish conviction and currently trade around the 1.3960-1.3965 area, up 0.10% for the day, amid mixed cues.

The US Dollar (USD) attempts a modest recovery from its lowest level since late October, touched on Wednesday, and turns out to be a key factor offering some support to the USD/CAD pair. Any meaningful USD appreciation, however, seems elusive amid bets that the US Federal Reserve (Fed) will lower borrowing costs again next week. The expectations were reaffirmed by the dismal US ADP report, which showed that private-sector employers unexpectedly shed 32,000 jobs in November.

The data points to a weakening US labor market and comes on top of signs of a slowdown in the world's largest economy, which backs the case for further policy easing by the Fed. This marks a significant divergence in comparison to the Bank of Canada's (BoC) hawkish signal, stating that it is likely finished cutting for now. Apart from this, some follow-through recovery in Crude Oil prices could underpin the commodity-linked Loonie and contribute to capping further gains for the USD/CAD pair.

Traders now look to Thursday's US economic docket, featuring Challenger Job Cuts and the usual Weekly Initial Jobless Claims. Apart from this, the Canada Ivey PMI might provide some impetus later during the North American session. The market focus, however, will remain on the release of the US Personal Consumption Expenditure (PCE) Price Index and the monthly Canadian jobs report. This, in turn, will play a key role in determining the next leg of a directional move for the USD/CAD pair.

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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