- USD/CAD falls slightly ahead of Fed Chair Powell’s speech.
- Investors are looking for fresh clues on interest rates ahead of the November meeting.
- The Canadian economy is estimated to have barely grown in July.
The USD/CAD pair is down near 1.3465 in the European session on Thursday after a strong recovery on Wednesday. The pair is facing a mild sell-off as the US Dollar (USD) struggles to extend the recovery, with the DXY Dollar Index facing pressure near 101.00.
The next move of the US Dollar will be guided by Fed Chair Jerome Powell’s speech at 13:20 GMT, where he is expected to provide fresh guidance on interest rates. At last week’s press conference, following the policy decision to cut interest rates by 50 basis points (bps) to 4.75%-5.00%, Jerome Powell’s comments suggested that larger-than-usual rate cuts will not be the new norm.
By contrast, the probability of the Fed making another 50-bps interest rate cut in November is 61%, up from 39% a week ago, according to the CME FedWatch tool.
Meanwhile, the Canadian dollar (CAD) will be influenced by monthly Gross Domestic Product (GDP) data for July, due out on Friday. Economists estimate that the Canadian economy grew by 0.1% after remaining flat in June.
USD/CAD is marking a fresh swing low near 1.3400 on a daily time frame, suggesting a firm bearish bias. The pair is weakening after sliding below August 28 low of 1.3440. A sloping 20-day exponential moving average (EMA) near 1.3545 indicates further downside.
The 14-day Relative Strength Index (RSI) is delivering a range-bound move in the 20.00-60.00 territory from 40.00-80.00, suggesting that pullbacks would be considered as selling opportunities by investors.
Going forward, a further correction below the immediate support of 1.3400 would expose the pair to the January 31 low of 1.3360 and the June 9 low of 1.3340.
In an alternative scenario, a recovery move above the psychological support of 1.3500 would take the pair towards the April 5 low of 1.3540, followed by the September 20 high of 1.3590.
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.
