The USD/CAD pair falls slightly but holds key support of 1.3700 in Friday’s New York session. The Loonie asset drops as the US Dollar (USD) falls sharply after failing to hold Thursday’s recovery. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 102.70.
The Greenback has come under pressure as the confidence of investors seems to have increased that the Federal Reserve (Fed) will start reducing interest rates from the September meeting. Market expectations for firm Fed rate cuts rose after the United States (US) Consumer Price Index (CPI) report for July indicated that price pressures are on track to return to the desired rate of 2%.
Meanwhile, traders pare bets supporting the Fed reducing interest rates in September with an aggressive approach as risks of potential recession ebbed after upbeat US Retail Sales data for July and lower-than-expected Initial Jobless Claims for the week ending August 9.
The data showed that Retail Sales rose at a robust pace of 1% from the estimates of 0.3% after contracting in June. Upbeat Retail Sales indicated that the overall demand has not collapsed, which investors were anticipating from weak Manufacturing PMI and slower job demand.
Meanwhile, the flash Michigan Consumer Sentiment Index (CSI) for August has improved higher than expected. The sentiment indicator rose to 67.8 from estimates of 66.9 and the prior release of 66.4.
Globally, weak Oil prices have weighed heavily on the Canadian Dollar (CAD). Oil prices have corrected sharply as investors look for fresh developments on Middle East conflicts. Market participants are anxious over Iran’s retaliation to the assassination of the Hamas leader by an Israeli air strike in Tehran.
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. Other factors include market sentiment and the health of the US economy.
The Bank of Canada (BoC) influences the CAD by adjusting interest rates. Higher interest rates tend to be positive for the CAD. The BoC can also use quantitative easing and tightening to influence credit conditions.
The price of Oil impacts the CAD value. Higher Oil prices tend to result in a greater likelihood of a positive Trade Balance, which is supportive of the CAD.
Inflation tends to lead central banks to put up interest rates, attracting more capital inflows from global investors seeking a lucrative place to keep their money.
Macroeconomic data releases gauge the health of the economy and can influence the direction of the CAD. A strong economy is good for the Canadian Dollar.