Canadian Dollar recovery stalls on strong US data, hawkish Fedspeak

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  • Upbeat US data and hawkish comments by Fed’s Williams throw a spanner on Canadian Dollar’s recovery
  • US Initial Jobless Claims and housing data endorse belief in strong labor market, hot inflationary trends. 
  • USD/CAD pullback is losing steam right above 1.3730 support area.

The Canadian Dollar (CAD) is trading higher for the second consecutive session on Thursday, yet with weaker bullish momentum. Strong US macroeconomic data and hawkish comments from New York Federal Reserve (Fed) President John Williams have provided some support to the USD.

US Initial Jobless Claims remained steady at relatively low levels last week. At the same time, the Philadelphia Fed Manufacturing Survey posted its best reading in a year, adding to the evidence of the strong US economic momentum.

Furthermore, US Existing Home Sales declined in March although their median price jumped 4.8% over the last twelve months, suggesting an inflationary contribution to the Consumer Price Index (CPI). In this context, Fed’s Williams has reiterated the idea that there is no urgency to rate cuts, putting the brakes on Canadian Dollar’s appreciation.

Daily digest market movers: USD/CAD finds support on back of strong US data

Canadian Dollar remains positive on Thursday despite USD trimming some losses. .

US Weekly Jobless Claims remain steady at 212K in the week of April 12, against expectations of an increase to 215K.

Philadelphia Fed Manufacturing Survey has increased to a 15.5 reading in April from 3.2 in March. The market had anticipated a decline to 1.5.

Existing Home Sales declined 4.3% in March after a 9.5% increase in February, although these data have been offset by the 4.8% yearly increment of the median sales price.

Fed’s Williams has stuck to the line that Fed decisions will be data-driven, reiterating that there is no rush to cut interest rates.

On Wednesday, US Beige Book reflected steady economic growth combined with sticky inflation expectations, a combination that has prompted investors to dial down Fed easing bets.

Bets for a Fed rate cut in July have dropped to 37% from 50% at the beginning of the week. Investors are now pricing in 40 bps of cuts in 2024, down from 150 bps in January.

Canadian Dollar price this week

The table below shows the percentage change of Canadian Dollar (CAD) against listed major currencies this week. Canadian Dollar was the strongest against the Japanese Yen.

USD   -0.07% 0.03% 0.00% 0.66% 0.87% 0.52% -0.25%
EUR 0.07%   0.09% 0.08% 0.74% 0.93% 0.60% -0.18%
GBP -0.03% -0.10%   -0.01% 0.64% 0.84% 0.50% -0.29%
CAD -0.01% -0.09% 0.01%   0.65% 0.86% 0.51% -0.30%
AUD -0.67% -0.74% -0.65% -0.66%   0.21% -0.14% -0.93%
JPY -0.86% -0.94% -0.83% -0.87% -0.21%   -0.33% -1.14%
NZD -0.54% -0.60% -0.52% -0.51% 0.14% 0.35%   -0.79%
CHF 0.26% 0.18% 0.29% 0.27% 0.92% 1.12% 0.78%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Technical analysis: USD/CAD in corrective pullback with bears looking at 1.3730 support area

The broader US Dollar trend remains positive, although the pair is going through a corrective pullback from overbought levels. Technical indicators are showing a moderate bearish momentum although the pair has stalled right above the 1.3730 support area,  following a five-day rally.

A deeper reversal below the mentioned 1.3730 level might find support at the 38.2% Fibonacci retracement level of April’s rally at 1.3705 and at  1.3660. On the upside, the immediate resistance is at 1.3845. Resistances are at 1.3784 and 1.3845.

USD/CAD 4-hour 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.