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Canadian dollar rises modestly as markets look for catalysts

  • The Canadian dollar found little gains on Wednesday.
  • Canadian market flows remain low, with no significant CAD data on the agenda.
  • US inflation figures due later in the week remain the key event risk.

He Canadian Dollar (CAD) rose on Wednesday, driven more by a general increase in risk appetite in the market and a bullish reversal in crude oil than by any change in CAD sentiment. Federal Reserve (Fed) Chairman Jerome Powell made his second appearance in two days before the US Congressional finance committees, presenting the Fed’s latest Semi-Annual Monetary Policy Report.

Canada has had a quiet week on the economic calendar, and the data-free CAD trading trend is set to continue until the release of Canadian inflation next week, expected next Tuesday, with Canadian retail sales scheduled for next Friday. Meanwhile, a key figure in the US inflation figures will dominate market flows this week, with US Consumer Price Index (CPI) inflation and Producer Price Index (PPI) wholesale inflation scheduled for this Thursday and Friday, respectively.

Market drivers: The Canadian dollar is slightly boosted by the increase in risk appetite in the market

  • CAD traders are bracing for a long wait for Canadian CPI inflation figures due out next week.
  • The data-light CAD finds support from rising Crude Oil offers on Wednesday, in addition to a general improvement in investor sentiment during the mid-week market session.
  • Fed Chair Powell stuck close to his familiar script during his two-day testimony before U.S. Congressional committees as he delivered the Fed’s latest Monetary Policy Report.
  • Fed Chair Powell noted that while the Fed still wants more confidence that inflation will decline to the U.S. central bank’s 2% annual target, that does not necessarily mean the Fed will wait until inflation has reached 2% to begin cutting rates.
  • However, Fed Chair Powell warned that despite declining inflation and a weakening labor market, housing and lodging inflation remains a concern.
  • According to the CME’s FedWatch tool, rate traders are still fully tilted toward a September rate cut, with markets pricing in at least a 25 basis point reduction in the federal funds rate on Sept. 18.

CAD price today

The table below shows the exchange rate of the Canadian Dollar (CAD) against major currencies today. The Canadian Dollar was the strongest currency against the New Zealand Dollar.

USD -0.12% -0.47% 0.21% -0.17% -0.09% 0.71% 0.17%
EUR 0.12% -0.33% 0.35% -0.04% 0.01% 0.81% 0.28%
GBP 0.47% 0.33% 0.71% 0.31% 0.34% 1.15% 0.60%
JPY -0.21% -0.35% -0.71% -0.37% -0.32% 0.45% -0.08%
CAD 0.17% 0.04% -0.31% 0.37% 0.07% 0.87% 0.31%
AUD 0.09% -0.01% -0.34% 0.32% -0.07% 0.79% 0.24%
NZD -0.71% -0.81% -1.15% -0.45% -0.87% -0.79% -0.54%
CHF -0.17% -0.28% -0.60% 0.08% -0.31% -0.24% 0.54%

The heatmap shows percentage changes of major currencies. The base currency is selected from the left column, while the quote currency is selected from the top row. For example, if you choose the Canadian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change shown in the chart will represent the CAD (base)/USD (quote).

Technical Analysis: Canadian Dollar Sees Slight Boost from Broad Market Forces

The Canadian Dollar (CAD) traded a step higher than the US Dollar (USD) on Wednesday, rising a scant sixth of a percent against the Greenback. The CAD weakened around three-tenths of a percent against the bullish British Pound (GBP), with the Canadian Dollar benefiting from selling pressure in the broader market pushing the New Zealand Dollar (NZD) lower. The CAD rose almost nine-tenths of a percent against the NZD on Wednesday.

The USD/CAD continues to trade just above 1.3600, but short-term pressure has pushed the USD lower against the CAD, sending the pair lower from intraday consolidation near 1.3640. The daily candlesticks continue to decline towards the 200-day exponential moving average (EMA) at 1.3590, as bids are compressed between the long-term moving average and a supply zone valued above 1.3750.

USD/CAD Hourly Chart

USD/CAD Daily Chart

The Canadian Dollar

The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the CAD. 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) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.

The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.

Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.

The released macroeconomic data measures 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 confidence surveys can 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 can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.

Source: Fx Street

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