- USD/CAD is retreating from the proximity of the yearly high reached on Monday.
- Dovish Fed expectations limit USD upside and trigger profit-taking.
- Lower oil prices could weigh on the CAD and help limit further losses.
The USD/CAD pair is retreating after a rally in the Asian session towards the 1.3865 region on Tuesday and for now, it seems to have snapped a nine-day winning streak to its highest level since November 2023. The intraday decline dragged spot prices below the mid-1.3800 zone in the last hour, although any meaningful corrective decline still seems elusive.
Crude oil prices remain under some selling pressure for the third consecutive day amid easing fears over a wider conflict in the Middle East. Adding to this, concerns over weak demand in China, the world’s largest crude importer, dragged crude to its lowest level since June 10. This, coupled with the Bank of Canada’s (BoC) dovish outlook, could continue to weigh on the commodity-linked CAD and act as a tailwind for the USD/CAD pair.
Meanwhile, the growing acceptance that the Federal Reserve (Fed) will begin its rate-cutting cycle in September keeps the US Dollar (USD) bulls on the defensive below a two-and-a-half-week high hit on Monday. Moreover, the Relative Strength Index (RSI) on the daily chart is showing slightly overbought conditions. This, in turn, is prompting some profit-taking around the USD/CAD pair, especially after the recent rally of nearly 300 pips from the monthly low.
Market participants are now looking forward to the US economic docket, with the release of the Conference Board Consumer Confidence Index and JOLTS job openings data. However, the focus will be on the outcome of the FOMC’s two-day monetary policy meeting on Wednesday. Additionally, the US Non-Farm Payrolls (NFP) report, due on Friday, will boost the USD in the near term and provide a fresh directional impetus to the USD/CAD pair.
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.
