- On Friday, the Canadian dollar advanced versus the US dollar.
- The Bank of Canada is planning another rate drop next week.
- Weakness in the US Dollar Index lifts the CAD higher than the CAD alone.
The Canadian Dollar (CAD) rose about a quarter of a percent against the US dollar on Friday, pushing higher but remaining firmly entrenched in a consolidation pattern that began in mid-December. The US Dollar is dropping across the board as a mostly ordinary trading week comes to a close, with the Loonie failing to find any inherent bidding pressure, signaling that bullish momentum is unlikely to sustain.
The Bank of Canada (BoC) is expected to drop interest rates by another quarter-point next week, while the Federal Reserve (Fed) is widely expected to keep interest rates unchanged for the first half of the year. With the USD/CAD interest rate differential expected to grow further, it is doubtful that FX markets will have plenty of motive to bid up the Loonie after both central banks’ rate calls, which are planned for next Wednesday.
Daily summary market movers: CAD gains thin ground as risk sentiment improves
- The Canadian dollar rose by around a quarter percent against the US dollar.
- The Loonie’s gains are being driven by declining market demand for the US dollar rather than underlying strength.
- The BoC is anticipated to decrease interest rates by 25 basis points next week.
- The Fed, which meets mere hours later, is expected to maintain steady.
- Next week’s economic data for the Loonie is light on noteworthy events.
Canadian Dollar Price Forecast
The USD/CAD consolidation phase continues to grind sideways as Loonie traders fail to make a meaningful move in either direction. Price movement remains limited around the 1.4400 handle, while the CAD routinely attempts new multi-year lows.
The pair’s most recent bullish trend has come to an end, as the 50-day Exponential Moving Average (EMA) rises to 1.4250, but no indicators of a technical turnaround have emerged. Near-term bids are still restrained by a technical floor priced at 1.4300 handles.
What major factors influence the Canadian dollar?
The primary factors influencing the Canadian Dollar (CAD) are the Bank of Canada’s (BoC) interest rate, 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 and imports. Other determinants include market sentiment, which determines whether investors are investing in riskier assets (risk-on) or seeking safe havens (risk-off), with risk-on being CAD-positive. The health of the US economy, which is its main trading partner, has a significant impact on the Canadian dollar.
How do the Bank of Canada’s choices affect the Canadian dollar?
The Bank of Canada (BoC) has a substantial impact on the Canadian dollar by determining the interest rates that banks can lend to one another. This affects everyone’s interest rate. The BoC’s principal purpose is to keep inflation between 1-3% by changing interest rates up or down. Higher interest rates tend to benefit the Canadian dollar. The Bank of Canada can also utilize quantitative easing and tightening to alter lending conditions; the former is CAD-negative, while the latter is CAD-positive.
How does inflation data affect the value of the Canadian dollar?
While inflation has typically been viewed as a negative feature of a currency since it reduces the value of money, the opposite has occurred in recent years with the loosening of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting greater capital inflows from global investors looking for a profitable location to park their money. This increases demand for the local currency, in this case, the Canadian dollar. Trading platforms may leverage such currency demand trends by integrating prop firm tech and using FX solutions for proprietary firms, providing traders with increased tools and data to help them make better decisions.