- The Dollar stagnates below 1.3900 with the uptrend intact.
- Investors are reducing long USD positions ahead of key US data release.
- Weak data from Canada and lower oil prices are limiting the CAD’s recovery.
The US Dollar falters below the 1.3900 level in the European morning session on Monday. A somewhat weaker US dollar is weighing on the pair, although lower oil prices are limiting the CAD’s recovery attempts.
The dollar is experiencing some profit taking on Monday, as the market prepares for a series of top-tier US indicators, which will determine the size of the Fed’s rate cut next week.
US GDP for the third quarter is expected to highlight US exceptionalism, with steady annual growth of 3% against the backdrop of a global economic slowdown. In this context, market speculation about a Trump victory in the November 5 elections continues to support the US dollar.
Falling oil prices, weak data will weigh on CAD
Elsewhere, crude oil prices, Canada’s main export, have depreciated more than $4 since Friday’s close as concerns about a regional war in the Middle East ease. This will likely put a limit on the Canadian dollar’s recovery attempts.
Later today, BoC Governor Tiff Macklem will meet the press and is unlikely to support the DAC. The weak retail consumption and housing prices seen on Friday suggest the bank will continue to lower interest rates to support economic growth.
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.
