The USD/CAD pair struggles to capitalize on the previous day’s modest gains and consolidates just above the 1.3800 mark during the Asian session on Thursday. Traders seem hesitant and opt to wait for the release of US inflation figures before placing fresh directional bets.
The US Producer Price Index (PPI) report will be published later this Thursday, while the US Consumer Price Index (CPI) is due on Friday. The crucial data will be looked at for more cues about the Federal Reserve’s (Fed) policy path, which, in turn, will play a key role in driving the US Dollar (USD) demand and provide some meaningful impetus to the USD/CAD pair.
In the meantime, traders have been pricing in a greater chance that the US central bank will raise borrowing costs at its policy meeting on September 15-16. Furthermore, inflation risks stemming from persistently higher energy prices underpin prospects for immediate Fed tightening. This, along with escalating US-Iran tensions, benefits the safe-haven Greenback.
In the latest developments surrounding the Middle East crisis, Iran attacked 10 ships near the Strait of Hormuz after the US announced it had sunk five Iranian oil tankers in the Gulf of Oman and near Kharg Island. This fuels concerns about a prolonged disruption to supplies, lifting crude oil prices to a fresh three-month top and acting as a tailwind for the USD.
Meanwhile, US bond yields remain supported as investors seem disappointed by the US Treasury’s announcement that it would buy back up to $6 billion in 10-year to 20-year maturities. This contributes to the modest USD uptick, though elevated crude oil prices might continue to underpin the commodity-linked Loonie and cap any further gains for the USD/CAD pair.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair maintains a bearish near-term tone beneath the 100-day Simple Moving Average (SMA) at 1.3926. The pair’s position below this longer-term average suggests rallies remain corrective for now, with the broader structure hinting at continued downside risk unless buyers can reclaim the 1.3900 mark.
On the downside, a sustained break and acceptance below the 1.3770-1.3765 region will be seen as a fresh trigger for bearish traders. This would set the stage for an extension of the recent well-established downtrend witnessed over the past two months or so.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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