Canadian Dollar heads for a sixth straight loss as Loonie falls under the Greenback wheel
- The Canadian Dollar shed further weight on Thursday as the US Dollar continues to climb.
- Canadian GDP contracted again, pulling the rug out from beneath an already-battered Loonie.
- The US Dollar is finding fresh bullish momentum from safe-haven flows as markets rebalance rate-cut expectations.
The Canadian Dollar (CAD) sank for a sixth consecutive session on Thursday, driven lower by a second straight contraction in headline Gross Domestic Product (GDP) growth on a monthly basis. Inflationary pressures and ongoing trade policy concerns on the US side are weighing on global risk appetite, bolstering the US Dollar (USD).
US Personal Consumption Expenditure Price Index (PCE) inflation ticked higher in June, a day after the Federal Reserve (Fed) threw cold water on September rate cut hopes on ongoing tariff and inflation concerns. US income figures also rose in June, adding further pressure to inflation expectations as price volatility factors get pushed higher from both the front and the back.
Daily digest market movers: Canadian Dollar sheds further weight as Greenback rebound extends
- The Canadian Dollar fell for a sixth straight day against the US Dollar, briefly pushing USD/CAD back above 1.3850 for the first time since May.
- Canadian GDP contracted by 0.1% MoM in June, the second contraction in a row as the Canadian economy continues to falter. Despite weakening economic data, the Bank of Canada (BoC) has its hands tied on interest rates, unable to cut any further as inflationary pressures remain elevated.
- US PCE inflation also accelerated again in June, with core PCE inflation rising by 0.3% versus the previous 0.2%, and annualized PCE inflation also jumped to 2.8% with the previous period seeing a similar upside revision.
- US Personal Income also rebounded 0.3% in June, putting further wage pressure on inflation metrics.
- US NFP net job gains figures will round out a mismatched trading week on Friday.
Canadian Dollar price forecast
An extended Canadian Dollar backslide has pushed the USD/CAD pair back into the top end for the near-term, breaking above recent consolidation and laying the groundwork for an extended bullish push in Greenback flows. The pair is still stuck below the 200-day Exponential Moving Average (EMA) near 1.3900, and deeply overbought conditions in technical oscillators are flashing strong warning signs that USD strength could be heading for a breather.
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.