USD/CAD pulls back from one-month peak, slides to 1.3600 amid renewed USD selling

• USD/CAD retreats from a one-month top and is pressured by a combination of factors.
• A positive risk tone prompts selling around the safe-haven buck and weighs on the pair.
• A fresh leg up in Oil prices underpins the Loonie and contributes to the intraday slide.

The USD/CAD pair struggles to capitalize on the Asian session move up to the 1.3645-1.3650 region, or a one-month top and drops to the lower end of its daily range in the last hour. Spot prices currently trade around the 1.3600 mark and for now, seem to have stalled a goodish rebound from a nearly two-week low touched on Wednesday.

The US Dollar (USD) surrenders a major part of its intraday gains to a one-week high amid the upbeat market mood, which turns out to be a key factor that attracts fresh sellers around the USD/CAD pair. Apart from this, rising Crude Oil prices underpin the commodity-linked Loonie and further contribute to the currency pair's intraday pullback of around 50 pips. The lack of follow-through selling, however, warrants some caution for bearish traders and before positioning for any further depreciating move. 

The US Federal Reserve (Fed) decided to kick-start the policy-easing cycle with an oversized rate cut on Wednesday, though downplayed expectations for a more aggressive reduction in borrowing costs going forward. This, in turn, continues to push the US Treasury bond yields higher and should act as a tailwind for the Greenback. Apart from this, bets for a larger interest rate cut by the Bank of Canada (BoC) next month should cap the Canadian Dollar (CAD) and limit losses for the USD/CAD pair. 

Dovish BoC expectations were fueled by consumer inflation figures released on Tuesday, which showed that Canada's CPI posted its smallest rate of increase since February 2021 and the core measures fell to the lowest level in 40 months. Even from a technical perspective, acceptance above the very important 200-day Simple Moving Average (SMA) and an intraday breakout through a one-week-old trading range supports prospects for some meaningful appreciating move in the near term. 

Traders now look forward to the US economic docket – featuring the release of Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Existing Home Sales data. Apart from this, US bond yields and the broader risk sentiment will drive demand for the safe-haven buck. This, along with Oil price dynamics, should allow traders to grab short-term opportunities around the USD/CAD pair.

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.

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