The Canadian Dollar (CAD) trades little changed against the US Dollar (USD) on Friday, as a rebound in the Greenback keeps USD/CAD confined within its week-old range. At the time of writing, the pair is trading around 1.3784, recovering slightly after dipping to an intraday low near 1.3755.
The US Dollar holds firm despite a mixed batch of US economic data released earlier in the day. Existing Home Sales rose by 0.5% MoM in November, slowing from October’s 1.5% increase.
Meanwhile, the University of Michigan’s final December survey showed a modest easing in sentiment. The Consumer Expectations Index was revised down to 54.6 from the preliminary estimate of 55.0, coming in below the market forecast of 55.0. The headline Consumer Sentiment Index was finalised at 52.9, slightly below both the earlier estimate of 53.4 and the forecast of 53.3.
On the inflation front, the University of Michigan’s final December survey showed a modest uptick in short-term inflation expectations. One-year consumer inflation expectations rose to 4.2%, above both the preliminary estimate and the market forecast of 4.1%. Longer-term inflation expectations, however, were unchanged, with the five-year outlook holding steady at 3.2%, in line with both the earlier estimate and market expectations.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 98.70, its highest level since December 11, extending its rebound after briefly dipping below 98.00 to its weakest level in over two months. The index is on track to post its first weekly gain in three weeks.
On the Canadian side, domestic data offered little support to the Loonie. Statistics Canada reported that Retail Sales fell by 0.2% MoM in October, missing market expectations for a flat reading and reversing September’s sharp 0.9% decline.
Core Retail Sales, which exclude autos, fell by 0.6% MoM in October, coming in weaker than the market forecast of a 0.2% increase and reversing September’s modest 0.1% gain.
Beyond the data, diverging monetary policy outlooks between the Bank of Canada (BoC) and the Federal Reserve continue to provide underlying support to the Loonie, potentially limiting upside in USD/CAD. Expectations for further monetary policy easing by the Fed next year may cap US Dollar gains, even as short-term rebounds persist.
Speaking in a CNBC interview, New York Fed President John Williams said policy remains mildly restrictive and still has room to move toward neutral, which he sees as slightly below 1% in real terms. Williams added that he sees no urgency to change the current policy stance and noted that recent data have not altered his broader outlook.
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.
