The Canadian Dollar (CAD) tumbled backward on Wednesday, falling over 0.6% against the US Dollar (USD) top-to-bottom before ending Wednesday in the red by 0.55% and putting the USD/CAD pair back into its highest bids in eight trading sessions.
A pop in Crude Oil prices sent the Canadian Dollar higher on Tuesday, but a Loonie resurgence proved to be short-lived after the US Dollar rose broadly on Wednesday, erasing the CAD’s early-week gains. Markets are now shifting their stance to face Thursday’s upcoming US Nonfarm Payrolls (NFP) report as investors look for signs of growing weakness in the US labor market.
In the daily chart, USD/CAD trades at 1.4043. The pair holds above the rising 50-day EMA at 1.3970 and the 200-day EMA at 1.3911, reinforcing a bullish bias. The positive slope of both averages keeps the uptrend intact. RSI at 54 (neutral) is edging higher, signaling firming momentum.
Momentum favors continued gains while dips stay contained above the 50-day EMA at 1.3970. A break below that threshold would expose the 200-day EMA at 1.3911 and would shift the near-term tone to consolidation. Above the short-term average, bulls would aim to extend the advance.
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.
