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Canadian Dollar Steady as Markets Prepare for Fed Dot Chart Update

  • The Canadian Dollar is trading steady on Tuesday with little momentum.
  • Canada presents weak economic data this week.
  • Fed rate cut expectations continue to dominate the market outlook.

The Canadian Dollar (CAD) trades mostly flat on Tuesday as investors hold firm ahead of key US data releases on Wednesday. The US Consumer Price Index (CPI) is expected to be released mid-week, followed by a new rate decision from the Federal Reserve (Fed) that is expected to keep rates in the 500-range. 525 basis points.

Canada is limited to releasing only low-level economic data this week, except for an appearance by Bank of Canada (BoC) Governor Tiff Macklem, who is scheduled for Wednesday. However, the BoC governor’s statement is likely to be overshadowed by market reactions to changes to the “dot plot” of the Fed’s Interest Rate Projections, which will be released at the same time as the decision. of Fed rates this week.

Daily Market Summary: Markets Get Jittery Ahead of Big Fed Presentation on Wednesday

  • The CAD finds little reason to move, trading within a quarter of a percentage point against its peers.
  • Building permits in Canada rose 20.5% in April, the largest monthly change in four years.
  • Markets expect US CPI inflation to cool to 0.1% monthly in May, down from 0.3% previously.
  • The US core CPI is expected to decline to 3.5% year-on-year from 3.6% previously.
  • The Fed is widely expected to keep rates where they are for now, but investors will be closely watching the Fed’s updated “dot plot” on Wednesday.
  • Rate markets see a slightly better than 50% chance of at least a quarter-point cut by the Fed in September, according to CME’s FedWatch tool.

Price of the Canadian Dollar Today

The table below shows the percentage change of the Canadian Dollar (CAD) against the major currencies listed today. The Canadian Dollar was the strongest against the Euro.

USD 0.26% 0.05% 0.19% 0.07% 0.18% -0.08% 0.23%
EUR -0.26% -0.21% -0.07% -0.19% -0.07% -0.34% -0.02%
GBP -0.05% 0.21% 0.14% 0.01% 0.12% -0.14% 0.17%
JPY -0.19% 0.07% -0.14% -0.12% -0.02% -0.29% 0.04%
CAD -0.07% 0.19% -0.01% 0.12% 0.11% -0.16% 0.16%
AUD -0.18% 0.07% -0.12% 0.02% -0.11% -0.27% 0.04%
NZD 0.08% 0.34% 0.14% 0.29% 0.16% 0.27% 0.32%
CHF -0.23% 0.02% -0.17% -0.04% -0.16% -0.04% -0.32%

The heat map shows the percentage changes of the major currencies against each other. The base currency is chosen from the left column, while the quote currency is chosen 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 box will represent CAD (base)/USD (quote).

Technical Analysis: CAD moves at familiar levels, but some dollar strength appears

The Canadian Dollar (CAD) traded narrowly on Tuesday, refusing to give up too much ground to the US Dollar and holding at familiar intraday technical levels. Elsewhere, the Canadian Dollar finds small gains, rising around a fifth of a percentage point against the Euro (EUR), the Swiss Franc (CHF) and the Japanese Yen (JPY).

USD/CAD briefly tested above 1.3780 in early trading on Tuesday as the US Dollar rides on small risk-off flows, but the CAD holds firm, limiting movement in the pair. CAD bidders will look for Dollar weakness to drag USD/CAD back from the 1.3800 area.

The 2024 highs sit at 1.3846, and any decline in USD/CAD will find a demand zone just above the 1.3600 area. The daily candlesticks are still on the high side, trading almost 4% higher for the year.

USD/CAD hourly chart

USD/CAD daily chart

The Canadian dollar

The key factors that determine the price of 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 product, 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 are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the 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 usually 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 also rises, 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 happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.

The published macroeconomic data measures the health of the economy and may 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, it may encourage the Bank of Canada to raise interest rates, resulting in a stronger currency. However, if economic data is weak, the CAD is likely to fall.

Source: Fx Street

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