Canadian Dollar continues struggling after GDP data

• USD/CAD regains footing as anticipation for another Bank of Canada interest rate cut mounts due to flat economic growth in August.
• US PCE core inflation remains at 2.7% in October, slightly above market expectations.
• US Initial Jobless Claims fell to 216K in the week ending October 25, below the markets consensus.

The USD/CAD pair gained traction on Thursday, rising by 0.15% to 1.3920. This uptick came as markets digest the United States Personal Consumption Expenditures (PCE) Price Index from September and weekly US Jobless Claims unexpectedly fell.

The Canadian Dollar (CAD) remains under pressure following the Bank of Canada‘s (BoC) decision to aggressively cut interest rates by 50 basis points (bps) to 3.75%, a larger-than-expected move. The market anticipates further policy easing by the BoC at its next meeting in December, contributing to the CAD’s weakness. The dovish bet also rose due to soft Canadian Gross Domestic Product (GDP) data released on Thursday.

Daily digest market movers: CAD weak due to soft GDP figures

• Flat economic performance in Canada, with GDP remaining stagnant in August and growing by a mere 0.1% in July, weighs on the Canadian Dollar .
• Subdued economic growth in Canada is expected to prompt the BoC to lower interest rates again in December.
• On the US front, the US PCE grew at a steady 2.1% yearly pace in October, down from Septembers 2.2%.
• Core inflation was maintained at 2.7%, above the market consensus expectation of 2.6%.
• US Jobless Claims unexpectedly fell to 216K in the week of October 25, indicating a robust labor market. 230K was expected.
• For Friday, economists estimate a modest 113K job creation figure in the October Nonfarm Payrolls number, lower than the previous months 254K.
• The Unemployment Rate is projected to remain steady at 4.1%.

USD/CAD technical outlook: Pair trades sideways with bullish bias

The USD/CAD is trading sideways with a slightly bullish bias. The Relative Strength Index (RSI) is at 76, in the overbought area, suggesting that buying pressure is intense. The Moving Average Convergence Divergence (MACD) is flat, suggesting that buying pressure is taking a breather. This combination of signals indicates that the pair is poised to consolidate in the next several sessions.

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 Canadas 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 Canadas 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.