Canadian Dollar eases from two-month high as USD preserves weekly gains ahead of US CPI
- USD/CAD steadies after the recent slide to a two-month low as traders keenly await the US CPI report.
- Rising crude oil prices continue to underpin the Loonie and keep a lid on further gains for the pair.
- The US-Iran standoff and Fed-hike bets support the safe-haven USD, and limit losses for spot prices.
The USD/CAD pair ticks higher during the Asian session on Wednesday, snapping a three-day losing streak to the 1.3915 area or its lowest level since June 10. Spot prices, however, lack bullish conviction and trade around 1.3930, awaiting the release of the latest US inflation figures.
The crucial US Consumer Price Index (CPI), due later today, and the Producer Price Index (PPI) on Thursday will be looked for fresh cues about the US Federal Reserve's (Fed) future policy path. The outlook, in turn, will play a key role in influencing the US Dollar (USD) demand in the near term and providing a fresh impetus to the USD/CAD pair. In the meantime, a combination of diverging forces might hold back traders from placing aggressive bullish bets or positioning for any meaningful appreciation.
Crude oil prices shot to a one-and-a-half-week high on Tuesday after an advisor to Iran’s Supreme Leader Mojtaba Khamenei said that the Strait of Hormuz will not be opened until the US meets Tehran's demands. Adding to this, Iran-backed Houthi rebels in Yemen escalated attacks on vessels in the Red Sea and Bab el-Mandeb Strait, targeting Saudi ships. This keeps war-risk premiums in play and acts as a tailwind for the black liquid, which should underpin the commodity-linked Loonie.
Meanwhile, investors remain worried that elevated energy prices will rekindle inflationary pressures and force the US central bank to adopt a more hawkish stance. According to CME Group's FedWatch Tool, traders are currently pricing in over a 75% chance that the Fed will raise borrowing costs by the end of this year. This, along with persistent geopolitical uncertainties, lends some support to the safe-haven Greenback and helps limit the downside for the USD/CAD pair, warranting caution for bears.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair sits just above the 100-day Simple Moving Average (SMA) at 1.3919 and the 50.0% Fibonacci retracement of the May-June rally, suggesting underlying demand after the recent pullback. On the topside, initial resistance emerges at the 38.2% Fibo. retracement at 1.3980, followed by the denser barrier at the 23.6% retracement near 1.4081, ahead of the cycle high anchor at 1.4244.
That said, a break below the 100-day SMA and the 50.0% retracement at 1.3898 would make the USD/CAD pair vulnerable to test the 61.8% level at 1.3817 and subsequent Fibonacci supports at 1.3701 and 1.3553.
(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.