Canadian Dollar rises 0.25% on the back of Oil price gains due to supply concerns
-
Canadian Dollar trades slightly higher supported by a rise in Oil prices on supply fears.
-
Canadian Manufacturing PMI comes out lower than expected in June though the response from price action is limited.
-
Traders are in two minds about the outlook for monetary policy from the Bank of Canada as GDP continues to grow but inflation falls.
Canadian Dollar rises versus the US Dollar on Tuesday during the US session on the back of higher Oil prices, Canada’s largest export, amidst fears of supply cuts by Saudi Arabia and Russia.
The Canadian Manufacturing PMI data release came out lower than expected and continues to show contraction but has had a limited impact on the exchange rate.
USD/CAD is trading in the lower 1.32s on Tuesday during the US session.
Canadian Dollar news and market movers
-
The Canadian Dollar is trading up by about 0.25% due to rising Oil prices. Whilst a muted outlook for global growth had weighed on Oil prices, fears of supply cuts by Saudi Arabia and Russia outweighed them.
-
The Bank of Canada (BoC) hiked rates by 0.25%, raising its Policy Interest Rate to 4.75% at its last meeting after a five-month pause. In its statement, the BoC gave increased consumer spending and higher-than-expected economic growth as the primary causes.
-
Canadian GDP in May rose by 0.4% after the economy flatlined in April, increasing expectations of more BoC rate hikes.
-
Core Inflation in May, however, fell to a lower-than-expected 3.7% versus the 3.9% forecast and 4.1% previous, reducing expectations the BoC will hike interest rates at its July 12 meeting.
-
The BoC’s inflation target is between 1-3%, so with Core inflation at 3.7%, it is not now as far off the upper threshold as previously.
-
The S&P Global Manufacturing PMI survey for June came out at 48.8, which was below the 49.6 forecast and the 49 previously. Despite the lower result, USD/CAD was little affected.
Canadian Dollar Technical Analysis: USD/CAD could reverse in line with longer-term uptrend
USD/CAD is in a long-term uptrend on the weekly chart since the 2021 lows. It has been consolidating in a broad sideways range since October 2022 and currently sits at the bottom of that range. Given that the trend has a tendency to extend the probability, therefore, favors longs over shorts.
The USD/CAD appears to have completed a measured move price pattern since the March 2023 highs. The measured move is a 3-wave zig-zag-like price pattern, much like an ABC correction in which the first and third waves are of a similar length (waves A and C on the chart below).
The measured move that has formed on USD/CAD looks like it has probably completed since waves A and C are of almost the same length. If so, it suggests the price has probably bottomed and is about to begin a cycle higher.
US Dollar vs Canadian Dollar: Weekly Chart
There is also a confluence of support just under the June lows in the late 1.30s, made up of several longer moving averages and a major trendline. This is likely to underpin price at this level and reduces the chances of a breakdown. Only a decisive break below 1.3050 would provide evidence this thick band of weighty support has been definitively broken. A decisive bearish break is one that is accompanied by a longer-than-average red candlestick or three red candlesticks in a row.
US Dollar vs Canadian Dollar: Daily Chart
The daily chart further suggests the potential for a bullish recovery. The move up from the June 27 bottom has been accompanied by strong momentum, as shown by the high reading on the Relative Strength Index (RSI) momentum indicator, which is higher than it was when prices were more elevated prior to the market bottom.
A decisive break above the 1.3270 key lower high would provide evidence of a short-term reversal. This move would likely see a rise up to possibly as high as 1.3400 and the 50-day Simple Moving Average. This would also see the short-term trend rise in line with the longer-term uptrend.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.