Canadian Dollar retreats further amid growing market uncertainty
- The Canadian Dollar eased another 0.6% lower on Monday against the Greenback.
- Bank of Canada rate call due on Wednesday, expected to cut another 25 bps.
- Market sentiment continues to sour as Trump administration tilts away from “recession” talk.
The Canadian Dollar (CAD) shed further ground on Monday, extending last Friday’s late-week declines and shedding another six-tenths one percent against the US Dollar. CAD markets are coiling ahead of the Bank of Canada’s (BoC) upcoming rate call during the midweek, which is expected to reduce interest rates another quarter of a percent to 2.75%.
Adding to market pressures forcing the Loonie lower are ongoing trade war and recession fears. Market sentiment has soured recently as US President Donald Trump’s waffling on his own tariff policy has left markets uneasy about the US’ ability to maintain price stability as US businesses grapple with steep potential price increases.
Daily digest market movers: Risk sentiment plummets on fresh recession fears
- Broad-market sentiment has soured steeply on Monday as investors pull out of equities and bonds, piling into the US Dollar and forcing the Loonie lower.
- US President Donald Trump, when asked about a possible recession looming over the US economy, tried to wave off the suggestion by branding it as a “transition period” for the US economy. Markets reacted poorly.
- Key US inflation data is due this week on Wednesday, and investors are hoping for another cooldown in headline US Consumer Price Index (CPI) inflation, which accelerated in January.
- The BoC’s latest rate call is also due on Wednesday, and is expected to trim another 25 bps from its main reference rate.
- On top of US CPI inflation, US Producer Price Index (PPI) inflation is due on Thursday, where markets are hoping for a similar easing in business-level inflation pressures.
Canadian Dollar price forecast
The Canadian Dollar continues to churn within a familiar consolidation range. USD/CAD has risen back into all-too-familiar chart territory near 1.4450. The 1.4500 major price handle remains a key technical barrier, keeping USD/CAD pinned in an uneasy sideways channel.
USD/CAD caught a fresh bounce from the 50-day Exponential Moving Average (EMA) near 1.4315. However, Loonie weakness appears to have run its course and the pair is quickly running into steep technical resistance. A near-term technical floor is priced in near the low end of USD/CAD’s ongoing channel, near the 1.4300 handle.
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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