- The Canadian Dollar holds Friday’s gains as US recovery attempts remain limited.
- Concerns about the strength of the US economy and rising bets of Fed cuts keep the US Dollar pinned near lows.
- In Canada, IVEY PMI and employment figures due later this week will give fundamental guidance to the CAD.
The Canadian Dollar keeps most of the ground it gained on Friday as the US Dollar Index fell about 0.8% as US employment data revealed that job growth increased much less than expected, and data from previous months was revised sharply lower.
July’s US Nonfarm Payrolls report crushed the view of a resilient US economy that served as one of the main fundamental supports for the Fed’s “patience” rhetoric and boosted investors’ expectations of monetary easing in the coming months.
Further pressure on the Fed to cut interest rates
Beyond that, the US President Trump fired a leading official of the Bureau of Labour Statistics, accusing her of rigging data, only to add to the market turmoil and increase pressure on an already weak Greenback.
Also on Friday, US Fed Governour, Adriana Kugler, a hawk, announced her resignation from August 8, and provided the US president a golden opportunity to provide additional support to the committee’s dovish party.
economy
In Canada, the BoC kept interest rates on hold last week, citing the resilient economy and the threat from the hefty tariffs announced by its southern neighbour, but the negative GDP data released the day after the decision added some pressure on the Canadian Dollar.
The lower Crude prices are not helping to improve the outlook of the Canadian economy, and investors fear an outlook of high inflation and soft economic growth that would pose a headache for the Bank of Canada. In this context, Canadian IVEY PMI and employment data, due later this week, will be observed with particular attention and might help to determine the Loonie’s near-term direction.
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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