Canadian Dollar grinds its way higher amid US data dropoff
- The Canadian Dollar gained another 0.15% against the Greenback on Friday.
- Cooling US Dollar demand is giving the Loonie a much-needed leg up.
- Canadian CPI inflation data looms ahead next week.
The Canadian Dollar (CAD) gained another leg up on the Greenback on Friday, climbing around one-sixth of one percent against the safe haven US Dollar (USD) as markets short the Greenback. US Retail Sales figures came in much softer than expected in January, but investors are holding steady in their risk-on stance for the time being.
Canada was functionally absent from the economic data docket this week. Canadian Consumer Price Index (CPI) inflation data is due next week, slated for Tuesday. US Retail Sales contracted sharper than expected; not enough to knock investor sentiment off of the table entirely, but still enough to leave a mark on overly-aggressive USD bulls.
Daily digest market movers: US Retail Sales crimp Greenback flows, bolster Loonie
- The Canadian Dollar rose 0.15% against the US Dollar, pushing USD/CAD further below 1.4200.
- US Retail Sales contracted by 0.9% in January, a much steeper decline than the expected -0.1%.
- However, the previous month’s figure was revised upwards to 0.7%, limiting the fallout of January’s downside print.
- US Industrial Production beat forecasts, bolstering market sentiment, although the figure still represented another backslide, falling to 0.5% versus the forecast 0.3% and last revised print of 1.0%.
- Despite the overall below-expectations prints in key data, markets are focusing on the broad range of revisions, which skewed heavily higher.
Canadian Dollar price forecast
The Canadian Dollar managed to chalk in its fourth straight session of gains against the Greenback on Friday, but overall bullish momentum remains limited. USD/CAD has waffled further back below the 50-day Exponential Moving Average (EMA) near 1.4280, but a firm technical floor is still priced in at the 200-day EMA just south of 1.4000.
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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