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The Canadian dollar remains sideways after Jerome Powell’s comments

  • The Canadian dollar struggled to build momentum.
  • Canada is largely absent from the economic calendar this week.
  • Fed Chairman Jerome Powell stuck close to the usual script, giving investors little to work with.

He Canadian Dollar (CAD) found little reason to move in any direction on Monday with little meaningful data on the supply side and a botched appearance by the US Federal Reserve (Fed) giving markets nothing to work with.

The only economic data from Canada this week will be May building permits, due on Friday, but little impact on the market is expected. The CAD has remained sideways against the US Dollar (USD), and the lack of Canadian data exposes the CAD to broader market flows.

Fed Chair Jerome Powell gave the first half of his two-day testimony before U.S. Congressional committees on Tuesday, delivering the Fed’s semiannual Monetary Policy Report to the Senate Banking, Housing and Urban Affairs Committee. Fed Chair Powell struck a familiar tone, staying close to talking points that have been made before and highlighting the Fed’s willingness to wait as long as necessary for inflation to ease toward the Fed’s 2% annual target. Investors, who had been hoping for more signs that the Fed was moving closer to interest rate cuts, interpreted the appearance as more hawkish than expected, dampening risk appetite and strengthening the dollar.

Fed Chair Powell will deliver the second half of the Fed’s Monetary Policy Report to the House Financial Services Committee on Wednesday. No change in rhetoric or new information is expected in the follow-up presentation midweek.

Later in the week, the US Consumer Price Index (CPI) for June is scheduled for release on Thursday, followed by the US Producer Price Index (PPI) for June on Friday. The June core CPI is expected to hold steady at 3.4% year-over-year, while the core PPI for the same period is expected to rise to 2.5% from 2.3% in the previous period. In both cases, meeting forecasts will disappoint markets that are overwhelmingly betting on a slowdown in inflation to yield at least a quarter-point rate cut by the Fed at the September 18 rate meeting.

USD/CAD Technical Outlook

The USD/CAD is stuck near 1.3640, treading water and moving in a tight range as the pair continues to fail to break above 1.3650. Last week’s bounce from the recent low at 1.3600 failed to push the pair above the 200-hour exponential moving average (EMA) at 1.2656, but the buying pressure remains too high to allow a drop to fresh lows.

The USD/CAD daily candles are caught in a technical trap, stuck in a congestion between the 200-day EMA at 1.3590 and a supply zone priced above the recent high near 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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