Canadian Dollar middles as markets mull over mixed US data
- The Canadian Dollar is treading water against the Greenback near 1.44.
- The Bank of Canada cut interest rates again this week.
- A declining rate differential and looming tariff threats keep the Loonie pinned.
The Canadian Dollar (CAD) went nowhere fast on Thursday, cycling near the 1.4400 handle against the US Dollar (USD). Loonie markets have gone flat after the Bank of Canada’s (BoC) latest rate cut, adding another 25 bps rate trim to the pile, and looming threats of 25% tariffs on Canada from US President Donald Trump, set to allegedly take effect on February 1, are having a chilling effect on market flows.
US data dominated trading headlines on Thursday, leaving CAD traders to wait until Friday’s Canadian Gross Domestic Product (GDP) print, though the monthly figure is so back-dated that impact will be minimal. US unemployment claims beat expectations, but US GDP growth flashed a warning sign that things may be slowing down faster than investors expected.
Daily digest market movers: Canadian Dollar markets hung out to dry
- The Canadian Dollar flattened on Thursday, but remains down one-half of one percent against the Greenback for the week.
- Canadian economic data is entirely absent on Thursday.
- Canadian GDP growth due on Friday, expected to show a contraction in November’s monthly growth figure.
- US GDP missed the mark in Q4, settling to 2.3% versus the forecast 2.6% and missing the previous quarter’s 3.1%.
- US weekly Initial Jobless Claims sank to 207K, easing back from the previous week’s 223K.
Canadian Dollar price forecast
The Canadian Dollar continues to grind through a rough sideways range against the Greenback. USD/CAD has been caught in a consolidation phase for over six weeks straight after the Loonie fell to multi-year lows in mid-December.
Price action is now poised for a technical squeeze with the 50-day Exponential Moving Average (EMA) rising into 1.4300. 1.4500 is the key handle for Greenback bulls to beat, while Loonie bidders will be looking to chalk in a successful technical turnaround and send intraday bids back to 1.4300.
USD/CAD daily chart
Canadian Dollar FAQs
The key factors driving 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 on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences 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 the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers 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 put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge 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 all 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 put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.