- The Canadian dollar made some progress against Greenback on Friday.
- The Bank of Canada is preparing to deliver another rate cut next week.
- Weakness in the US Dollar Index pushes the CAD higher than the CAD itself.
The Canadian dollar (CAD) gained about a quarter of one percent against Greenback on Friday, testing higher but still entrenched in a consolidation pattern that began in mid-December. The US dollar followed across the board to end a largely unremarkable trading week, rather than the Loonie finding any substantial bidding pressure, meaning the bullish momentum is unlikely to continue.
The Bank of Canada (BOC) is preparing to deliver another quarterly rate cut next week, while the Federal Reserve (FED) is expected to broadly stand on interest rates through the first half of the year. With the USD/CAD interest rate range widening, FX markets are unlikely to find much reason to bid Loonie after both central banks made their call appearances, both scheduled for next Wednesday.
Daily Digest Market Movers: CAD gains thin ground on risk sentiment
- CAD rose about a quarter of a percent against Greenback.
- Loonie’s gains come from softening market demand for the US dollar rather than any intrinsic strength.
- The BOC is expected to cut interest rates by 25 basis points next week.
- The Federal Reserve, just hours later, is expected to hold steady.
- A little note is on the Loonie’s economic data docket next week.
Canadian dollar price forecast
The USD/CAD consolidation phase continues to grind sideways as Loonie traders struggle to push either way decisively. Price action remains restricted around the 1.4400 handle, although CAD is frequently testing fresh lows.
The pair’s recent bullish phase has really run out as the 50-day Exponential Moving Average (EMA) rises to 1.4250, but signs of a technical turnaround remain absent. Near-term bidding remains tied to a technical floor with a price in the 1.4300 handle.
USD/CAD daily chart
Questions and answers in Canadian dollars
The main factors that drive the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BOC), the price of oil, Canada’s largest export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment—whether investors are taking more on risky assets (risk) or seeking safety (risk)—with positive risk CAD. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BOC) has a major influence on the Canadian dollar by setting the level of interest rates that banks can convince each other. This affects the level of interest rates for everyone. The main goal of the BOC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive CAD.
The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of CAD. In general, if the price of oil rises, CAD also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the probability of a positive trade balance, which also supports CAD.
While inflation has always been thought of as a negative factor for currency because it reduces the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to raise interest rates which attracts more capital inflows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Visualizing macroeconomic data assesses 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 sentiment surveys can influence the trend of CAD. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to set interest rates, leading to a stronger currency. If economic data is weak, CAD will likely fall.