Market Data 
- USD/CAD retreats from a multi-week top and is weighed down by a combination of factors.
- Rebounding Oil prices underpin the Loonie and exert pressure amid renewed USD selling.
- The downside seems limited as traders keenly await the release of the crucial US CPI report.
The USD/CAD pair struggles to capitalize on the overnight breakout momentum through the very important 200-day Simple Moving Average (SMA) and retreats from a nearly three-week top, around the 1.3615 area touched earlier this Wednesday. Spot prices extend the steady intraday descent through the first half of the European session and drop to the 1.3590-1.3585 region, or a fresh daily low in the last hour.
Crude Oil prices rallied around 1.75% and moved away from the lowest level since May 2023 touched on Tuesday amid concerns about supply disruption in the wake of Hurricane Francine in the United States (US). This is seen underpinning the commodity-linked Loonie, which, along with the emergence of fresh US Dollar (USD) selling, turn out to be key factors exerting downward pressure on the USD/CAD pair.
That said, hopes for additional interest rate cuts by the Bank of Canada (BoC), bolstered by Friday’s disappointing Canadian jobs data, should keep a lid on any meaningful appreciating move for the Canadian Dollar (CAD). Apart from this, reduced bets for a larger interest rate cut by the Federal Reserve (Fed), along with a softer risk tone, could offer support to the safe-haven buck and limit losses for the USD/CAD pair.
Traders also seem reluctant and might prefer to wait for the release of the crucial US Consumer Price Index (CPI) report before placing fresh directional bets. Hence, it will be prudent to wait for strong follow-through selling before confirming that the USD/CAD pair’s recent recovery from the 1.3440 region, or a multi-month low touched in August has run its course and positioning for a further depreciating move.
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.
