USD/CAD extends its recovery near 1.3500 as traders brace for US PMI data
- USD/CAD trades in positive territory for the fifth consecutive day around 1.3500 in Monday’s early Asian session.
- Traders await the US August ISM Manufacturing PMI on Tuesday ahead of US employment data.
- The rebound of crude oil prices might support the CAD and cap the pair’s upside.
The USD/CAD pair trades on a stronger note near 1.3500 during the early Asian session on Tuesday. The USD Index (DXY), which measures the USD’s value against a basket of six major currencies, consolidated around 101.60 as traders prefer to wait on the sidelines ahead of the key labor data this week. On Tuesday, the US ISM Manufacturing PMI will be in the spotlight.
The Greenback remains on the defensive, marking its biggest monthly drop this year in August amid the expectation that the US Federal Reserve (Fed) will cut interest rates in September. “The dollar has been under pressure and it will remain under pressure over the remainder of this year,” said Guy Miller, chief market strategist, Zurich Insurance Group.
The US ISM Manufacturing PMI for August, which is due on Tuesday, is expected to improve to 47.5 in August from 46.8 in July. If the reading shows a stronger-than-expected outcome, this could provide some support to the US Dollar (USD) against the Canadian Dollar (CAD).
The attention will shift to the US August Nonfarm Payrolls (NFP) on Friday, which is estimated to rise to 165K in August from 114K in July. This report could provide some hints about the size and pace of the US interest rate cut by the Fed this year.
Meanwhile, supply concerns surrounding Libya’s oil output could underpin the crude oil prices and boost the commodity-linked Loonie. It’s worth noting that Canada is the largest Oil exporter to the United States (US), and higher crude oil prices tend to have a positive impact on the CAD value.
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.