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- Canadian Dollar poised for further gains ahead of Canadian GDP figures
Canadian Dollar poised for further gains ahead of Canadian GDP figures
- The Canadian Dollar halted a midweek pullback but still struggling to find gains.
- Canada is set to release its latest GDP figures on Friday.
- Canadian data prints are likely to be overshadowed by a fresh round of US PCE inflation.
The Canadian Dollar (CAD) tested higher ground against the Greenback on Thursday, looking to put a stop to the midweek’s pullback. However progress remains limited as jittery markets keep one foot in the US Dollar as key US inflation data due on Friday could set the tone for the Federal Reserve’s (Fed) upcoming rate decision in September.
Canada is slated to print its latest round of Gross Domestic Product (GDP) figures on Friday, but a double-header of high impact US Personal Consumption Expenditure Price Index (PCE) inflation due at the same time will likely swamp out CAD flows as investors lean into bets that cooling inflation will keep the Fed on pace to deliver a first rate cut on September 18.
Daily digest market movers
- US GDP figures on Thursday showed the US economy grew slightly faster than expected, printing 3.0% in Q2 on an annualized basis.
- Markets broadly anticipated a steady print at 2.8%, in-line with the previous figure.
- Canadian Q2 GDP due on Friday is forecast to tick down to 1.6% from 1.7%, with the MoM figure in June easing to 0.1% from 0.2%.
- The big data print for the week is Friday’s US PCE inflation. Core US PCE for the year ended in July is expected to print at 2.7%, slightly higher than the previous period’s 2.6%.
- An upside swing in inflation data could crimp broad-market hopes for an extended rate cut from the Fed on September 18.
Canadian Dollar price forecast
With the Canadian Dollar (CAD) dumping out of an extended technical correction against the US Dollar, CAD bidders may be looking to chalk in some more gains against the Greenback as markets continue to tilt in a USD-negative stance. USD/CAD continues to churn just south of the 1.3500 handle in the near-term, and the pair has dropped well below the 200-day Exponential Moving Average (EMA) near 1.3625.
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.
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