Canadian Dollar deepens decline ahead of BoC meeting
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Canadian Dollar loses ground on Tuesday before a key interest rate decision by the Bank of Canada.
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Core Inflation has fallen substantially in Canada whereas it remains stubbornly high in the US, and this is bullish for USD/CAD.
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The technical picture is mixed but slightly bullish after the break above the key 1.3270 high.
Canadian Dollar (CAD) trades lower against the US Dollar (USD), on Tuesday, ahead of the key Bank of Canada (BoC) interest rate decision on Wednesday.
USD/CAD is trading in the 1.32s during the US session.
Canadian Dollar news and market movers
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The Canadian Dollar edges lower in a calm-before-the-storm effect as traders await the BoC Interest Rate Decision scheduled for 14:00 GMT, Wednesday, July 12.
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The Core Consumer Price Index (CPI) drives interest rate decisions, and in Canada, core inflation has fallen to 3.7% from 4.1% in the last reading, placing less pressure on the BoC to continue raising rates.
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Since higher rates are positive for CAD as they draw more capital inflows, a decision to leave rates unchanged would be negative for CAD, and positive for USD/CAD, which would probably rise since the Federal Reserve is, in contrast, almost certain to raise rates at its July 26 meeting, given the 5.3% Core CPI inflicted on the US.
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The BoC is prone to surprising markets, however, as FXStreet Senior Analyst Yohay Elam points out in his BoC preview, so one cannot completely discount the possibility of a hike at Wednesday’s meeting.
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Such a move would benefit from the advantage of surprise and probably see USD/CAD sell off substantially.
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The second half of 2023 is unlikely to be as good as the first say analysts at one of Canada's largest banks, National Bank of Canada, as the BoC will take a cautious approach to changing interest rates.
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Furthermore, a global economic slowdown will weigh on commodity prices, negatively impacting Canada's terms of trade, says the note cited on Poundsterlinglive.com.
Canadian Dollar Technical Analysis: Short-term trend giving mixed signals
USD/CAD is in a long-term uptrend on the weekly chart, which began after price rose following the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within the uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities overall an eventual continuation higher, favoring longs over shorts.-
The pair appears to have completed a large measured move price pattern that began forming at the March 2023 highs. This pattern resembles a 3-wave zig-zag, much like an ABC correction in which the first and third waves are of a similar length (labeled waves A and C on the chart below).
USD/CAD’s measured move looks like it has completed given waves A and C are of a similar length. This suggests price probably bottomed at the June 27 lows and is now at the start of a new cycle higher.
US Dollar vs Canadian Dollar: Weekly Chart
A confluence of support situated under the June lows in the upper 1.3000s, that is made up of several longer moving averages and a major trendline, provides a backstop to further losses. Only a decisive break below 1.3050 would indicate this thick band of weighty support has been definitively broken, bringing the uptrend into doubt.
US Dollar vs Canadian Dollar: Daily Chart
The daily chart shows how price has now broken decisively above the 1.3270 key last lower high of the prior downmove, which is a bullish sign. ¡
USD/CAD subsequently rose up to just shy of the 1.3400 crossroads where the 50-day Simple Moving Average (SMA) is located, last Thursday, before reversing lower last Friday. The long green up day followed by the long red down day creates a two-bar reversal pattern which is a short-term bearish sign, however, this clashes with the other bullish indications, suggesting a balanced market.
It will take a decisive break above the 50-day SMA to keep the uptrend momentum going. Canadian Dollar bulls marginally have the upper hand with the odds slightly favoring a continuation higher.
Canadian Dollar FAQs
What key factors drive the Canadian Dollar?
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.
How do the decisions of the Bank of Canada impact 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.
How does the price of Oil impact the Canadian Dollar?
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.
How does inflation data impact the value of the Canadian Dollar?
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.
How does economic data influence the value of 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.