- USD/CAD struggles to gain significant traction and is influenced by a combination of divergent forces.
- Dovish Fed expectations weigh on USD; Bets on a further BoC rate cut keep CAD bulls on the sidelines.
- The scenario advises caution before positioning for an extension of last week’s rally from a multi-month low.
The USD/CAD pair struggles to capitalize on last week’s good recovery from its lowest level since March 8, although it manages to stay above the psychological level of 1.3500 during the first half of the European session on Monday.
The US Dollar (USD) selling bias remains unchanged for the third day in a row amid growing bets on more aggressive policy easing by the Federal Reserve (Fed), which, in turn, is seen as a headwind for the USD/CAD pair. Meanwhile, rising geopolitical risks in the Middle East lend some support to crude oil prices and benefit the commodity-linked Loonie, further contributing to capping the currency pair. That said, expectations of a further rate cut by the Bank of Canada (BoC) cap the Canadian Dollar (CAD) and limit the decline in spot prices.
From a technical perspective, the oscillators on the daily chart, although having recovered from lower levels, are yet to confirm a positive bias and advise some caution before positioning for any significant upside. Meanwhile, the USD/CAD pair appears to have found acceptance above the 38.2% Fibonacci retracement level of the recent decline from the monthly peak and is currently hovering around the 200-hour SMA. Any further move higher will likely attract new sellers near the 50% Fibonacci level, around the 1.3535 region.
The next relevant hurdle lies near the 1.3555-1.3560 area, or the 61.8% Fibonacci level, and the very important 200-day SMA, currently situated just before the 1.3600 level. The latter should act as a key pivot point, which if broken decisively should lift the USD/CAD pair to the monthly peak, around the 1.3645-1.3650 region. Some follow-on buying will be seen as a new trigger for bullish traders and pave the way for further appreciation move in the near term.
Conversely, a sustained break below the 1.3500 level will likely find some support near the 1.3465 region, below which the USD/CAD pair could retest the multi-month low, around the 1.3420 region. . Some follow-through selling below the 1.3400 level will pave the way for a resumption of the recent well-established downtrend seen over the past two months or so.
USD/CAD 1-hour chart
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.
