The USD/CAD pair falls back after a short-lived pullback move to near 1.3837 in Thursday’s American session. The Loonie asset retreats as the US Dollar (USD) surrenders majority of its intraday gains and the Canadian Dollar (CAD) strengthens.
The US Dollar retreats amid a sharp decline in preliminary Q2 Unit Labor Costs and the ISM Manufacturing PMI of July. Unit Labor Costs, a key measure of employee cost beared by the employer, declined to 0.9% from the estimates of 1.8% and the prior release of 3.8%, downwardly revised from 4.0%.
Meanwhile, the ISM Manufacturing PMI contracted at a faster pace to 46.8 from the estimates of 48.8 and the prior release of 48.5.
The Canadian Dollar advances amid a sharp recovery in the Oil price due to deepening risks of escalation in Middle East tensions. West Texas Intermediate (WTI), futures on NYMEX, gained an almost 4.5% in a single trading session on Wednesday. However, the Oil price edges lower in Thursday’s session but holds gains tightly. It is worth noting that Canada is the largest exporter of Oil to the United States (US) and higher Oil prices strengthen the Canadian Dollar.
USD/CAD declines to near Wednesday’s low of 1.3787. A breakdown below the same will trigger an Evening Star candlestick pattern. The reliability of the aforementioned candlestick appears strong as it has formed near the horizontal resistance plotted from April 16 high of 1.3846.
It would be early to consider a bearish reversal as the asset holds the 20-day Exponential Moving Average (EMA), which trades around 1.3760. Also, the 14-day Relative Strength Index (RSI) oscillates inside the bullish range of 60.00-80.00, suggesting that the bullish momentum is still intact.
A fresh buying opportunity would emerge if the asset breaks above July 29 high of 1.3865. This would drive the asset towards 1 November 2023 high at 1.3900, followed by 13 October 2022 high at 1.3978.
On the contrary, a decisive breakdown below July 2 high at 1.3755 will expose the asset to the round-level support of 1.3700 and July 17 low at 1.3657.
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.
Analysis
In summary, the USD/CAD pair has fallen back due to weakening US Dollar and strengthening Canadian Dollar. Factors such as downbeat data from the US and a sharp recovery in Oil prices have influenced this movement. Traders should watch for key levels such as 1.3865 for a potential buying opportunity or 1.3755 for a bearish reversal. Understanding the factors driving the Canadian Dollar and its relationship with the US economy can help traders make informed decisions in the Forex market.