- USD/CAD retreats as Dollar fails to hold onto intraday gains.
- The US Dollar weakens on disappointing US Q2 Unit Labor Costs and a sharp contraction in the July ISM Manufacturing PMI.
- A strong recovery in oil prices has strengthened the Canadian dollar.
The USD/CAD pair is retreating after a short-lived retracement move near 1.3837 in the American session on Thursday. The Loonie asset is retreating as the US Dollar (USD) gives back most of its intraday gains and the Canadian Dollar (CAD) is strengthening.
The US Dollar retreated amid a sharp drop in preliminary second quarter Unit Labor Costs and the July ISM Manufacturing PMI. Unit Labor Costs, a key measure of the cost of employee borne by the employer, declined to 0.9% from estimates of 1.8% and the previous release of 3.8%, revised down from 4.0%.
Meanwhile, the ISM manufacturing PMI contracted at a faster pace to 46.8 from estimates of 48.8 and the previous release of 48.5.
The Canadian Dollar is advancing amid a strong recovery in the oil price due to rising risks of escalation in tensions in the Middle East. The West Texas Intermediate (WTI) futures on NYMEX gained almost 4.5% in a single trading session on Wednesday. However, the oil price is down in Thursday’s session but holding on to gains firmly. It is worth noting that Canada is the largest exporter of oil to the United States (US) and higher oil prices strengthen the Canadian Dollar.
USD/CAD is falling near Wednesday’s low of 1.3787. A break below it will trigger an Evening Star candlestick pattern. The reliability of the aforementioned candlestick seems strong as it has formed near the horizontal resistance drawn from April 16’s high of 1.3846.
It would be premature to consider a bearish reversal as the asset is holding the 20-day exponential moving average (EMA), which is trading around 1.3760. Moreover, the 14-day Relative Strength Index (RSI) is oscillating within the bullish range of 60.00-80.00, suggesting that the bullish momentum is still intact.
A fresh buying opportunity would arise if the asset breaks above the July 29, 2023 high of 1.3865. This would take the asset towards the November 1, 2023 high of 1.3900, followed by the October 13, 2022 high of 1.3978.
Conversely, a decisive break below the July 2 high at 1.3755 will expose the asset to the round-level support at 1.3700 and the July 17 low at 1.3657.
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.
