- The Canadian Dollar tested a new eight-month high against the US Dollar on Thursday.
- Overall market momentum remains limited ahead of key US NFP labor figures.
- Loonie gains could get capped from here as Canadian firms fear an economic downturn.
The Canadian Dollar (CAD) tested fresh eight-month peaks against the US Dollar (USD) on Thursday. Loonie gains remain limited, however: US Nonfarm Payrolls (NFP) jobs figures will be closing out the trading week, and investors are growing apprehensive about labor and economic growth factors on both sides of the 49th parallel.
The Bank of Canada (BoC) held interest rates flat this week after seven consecutive rate cuts, helping to boost the Loonie. However, topside momentum remains limited as Canadian businesses grow increasingly wary of decaying economic conditions.
Daily digest market movers: Canadian Dollar tests higher ground as Greenback swirls
- The Canadian Dollar briefly tested fresh eight-month highs against the US Dollar, sending USD/CAD below 1.3650 for the first time since October of last year.
- Market sentiment remains tight as investors head into Friday’s US NFP labor data release window.
- US NFP net job gains for May are expected to slow to 130K versus the previous print of 177K.
- Investor sentiment remains further constrained as traders watch US President Donald Trump and former Trump taskmaster Elon Musk go to loggerheads on social media.
- Canadian labor data is due to get eclipsed on Friday by NFP’s long shadow, however that may be for the best for Loonie longs: Canadian Net Change in Employment is expected to contract by 15K net jobs in May, wiping out April’s scant 7.4K growth.
Canadian Dollar price forecast
The Canadian Dollar has gained ground or held steady against the US Dollar for all but two of the last 16 consecutive trading sessions, pushing USD/CAD into fresh multi-month lows below 1.3650. The pair has fallen 2.72% top-to-bottom from May’s swing high into 1.4015, and long-run downward trendline channels are keeping price action locked on bearish rails.
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.
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