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- The Canadian dollar rose 0.80% against the US dollar on Friday.
- Canada saw an unexpected improvement in core retail sales.
- Fed officials agree to rate-cutting cycle, sparking fresh risk-off
The Canadian dollar was mixed on Friday, but saw fresh bids rise against the US dollar on fresh signals of a rate cut from the Bank of Canada. Federal Reserve (US central bank) pushed the US dollar to its lowest levels. The Canadian dollar rose more than eight-tenths of a percent against the US dollar, and is heading for its best day against the US dollar since mid-2023.
Canada reports better-than-expected GDP rise Retail Sales In June, but core retail sales contracted as expected during the same period, dampening demand for the Canadian dollar. Canadian economic figures remain weak next week, leading up to Friday’s update on Canada’s second-quarter GDP.
Daily summary of market drivers
- The Canadian dollar rose more than 0.8% against the weaker U.S. dollar on Friday.
- Finally, Federal Reserve officials have opened the door to an interest rate-cutting cycle.
- Federal Reserve policymakers threw the floodgates open as Fed Chairman Jerome Powell agreed to cut interest rates in September while speaking at the Jackson Hole Economic Symposium.
- Markets are fully prepared for a rate cut in September.
- Under the current cut, markets are betting on a one-in-three chance of a double-digit 50 basis point cut on September 18, with the rest of the board expecting a quarter-point cut.
Canadian Dollar Price Forecast
The Canadian dollar rose to a multi-month high against the U.S. dollar on Friday, rising more than 0.8% to hit the 1.3500 level for the first time since early April. The Canadian dollar is on track to close higher against the U.S. dollar for a third straight week, up about 3.3% in a rebound from August lows against the U.S. dollar.
The broad-based weakness of the US dollar in the market sent the USD/CAD pair table The decline is gaining speed, extending below the 200-day exponential moving average (EMA) near 1.3632. Short sellers are firmly in control of the pair, but near-term exhaustion could be on the cards as price action rediscovers the technical congestion zone in early 2024.
USD/CAD Daily Chart
Frequently Asked Questions About the Canadian Dollar
The main factors that move 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 and its imports. Other factors include market sentiment – whether investors are moving towards riskier assets (risk-on) or seeking safe havens (risk-off) – with risk-on being positive for the Canadian dollar. As its largest trading partner, the health of the U.S. economy is also a major factor affecting the Canadian dollar.
The Bank of Canada has a significant influence on the Canadian dollar by setting the level of interest rates at which banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s primary goal is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the Canadian dollar and the latter positive for the Canadian dollar.
The price of oil is a major factor that affects the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the Canadian dollar. Generally, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is true if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has traditionally been seen as a negative factor for a currency because it reduces the value of money, the opposite has been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, which attracts more capital inflows from global investors looking for a profitable place to park their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data measures the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing and service PMIs, employment, and consumer sentiment surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it can encourage the Bank of Canada to raise interest rates, which strengthens the currency. However, if economic data is weak, the Canadian dollar is likely to fall.
