- USD/CAD bulls are taking a pause after the recent rally to the highest level since August 6.
- The recent rally in the USD acts as a tailwind for the pair amid a drop in oil prices.
- Expectations of a further rate cut by the BoC support the prospects of a new bullish move in the near term.
The USD/CAD pair oscillates within a tight range around the 1.3830 region during the Asian session on Tuesday and remains well within distance of its highest level since August 6 touched the previous day. Meanwhile, the fundamental backdrop appears to be tilting in favor of the bulls and suggests that the path of least resistance for spot prices remains to the upside.
Crude oil prices are struggling to capitalize on modest gains from the previous day amid concerns about slowing demand and a prolonged economic downturn in China, the world’s largest importer. Aside from this, expectations of a further 50 basis point rate cut from the Bank of Canada, bolstered by softer domestic consumer inflation figures, could continue to weaken the commodity-linked Loonie. This, along with the strong underlying bullish sentiment around the US Dollar (USD), validates the positive near-term outlook for the USD/CAD pair.
Upbeat US macroeconomic data suggests the economy remains in a strong position, which should allow the Federal Reserve (Fed) to be patient in reducing interest rates. Furthermore, recent comments from several influential FOMC members reaffirmed market expectations for less aggressive easing policy by the US central bank. This, in turn, drives US Treasury yields and the Dollar Index (DXY), which tracks the value of the Dollar against a basket of currencies, to their highest level in almost three months. .
Furthermore, a change in global risk sentiment, as shown by a softer tone around equity markets, should continue to benefit the safe-haven dollar and support the prospects of a new bullish move for the USD/CAD pair. Traders now await the release of the US Richmond Manufacturing Index, which, along with a speech by Philadelphia Fed President Patrick Harker, will boost demand for the USD. Apart from this, oil price dynamics should provide some boost to the USD/CAD pair.
The Canadian Dollar FAQs
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, but 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
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.
