- The Canadian Dollar retreated on Friday as CAD traders retreat for the weekend.
- Canada reported another sharp contraction in new building permits.
- US wholesale PPI inflation accelerated, but markets are trying to ignore it.
He Canadian Dollar (CAD) The US dollar lost weight on Friday, falling to the bottom as one of the worst-performing major currencies in the final session of the trading week. Markets are broadly ignoring an unexpected acceleration in US wholesale Producer Price Index (PPI) inflation, focusing instead on Consumer Price Index (CPI) inflation that cooled earlier in the week.
Canada recorded the second-sharpest contraction of 2024 in building permits in May, further weakening the CAD and setting up the Canadian dollar to churn on the lower side as traders await next Tuesday’s Canadian CPI inflation figure.
Market drivers: Canadian dollar stumbles on poor housing data
- Building permits in Canada fell 12.2% in May, the second-largest drop in 2024.
- US core PPI wholesale inflation accelerated markedly in June, rising to 3.0% year-on-year compared with 2.5% expected.
- The figure for the previous period was also revised upwards to 2.6% from the initial 2.3%.
- The US monthly core PPI rose 0.4% on a monthly basis, double the 0.2% forecast, while the prior month’s figure was also revised up to 0.3% from 0.0% initially.
- The University of Michigan Consumer Sentiment Index for July fell to a seven-month low of 66.0 from 68.2 previously, reversing the expected rise to 68.5.
- Despite the rise in producer-level inflation, markets are generally leaning to the bullish side, focusing on Thursday’s lower-than-expected CPI inflation figure.
Technical Analysis: USD/CAD Trapped in Short-Term Mid-Range
The Canadian Dollar (CAD) is one of the worst performing currencies on Friday, losing weight across the board and struggling to develop any meaningful momentum against the US Dollar. USD/CAD is trapped just above the 1.3600 level, and threatens to enter a more protracted consolidation phase as the pair finds little reason to advance too far in either direction.
Intraday bids remain capped below the 200-hour exponential moving average (EMA) at 1.3640, with tests on the downside failing to find a foothold below 1.3600. The daily candles are supported by the 200-day EMA at 1.2594, keeping a lid on bearish pressure while a valued supply zone above 1.3750 limits any upside attempts.
USD/CAD Hourly Chart
USD/CAD Daily Chart
Canadian Dollar FAQs
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
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
