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Canadian Dollar trades lower after the release of key macro data from both the US and Canada, including Canadian inflation.
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The data comes out lower-than expected across the board, weighing on both currencies, although the US Dollar fairs better.
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Monday’s weak close reduces the technical bullishness of the strong reversal that started on Friday for USD/CAD.
The Canadian Dollar (CAD) falls against the US Dollar (USD) on Tuesday, after the release of lower-than-forecast Canadian inflation data for June, but also below-estimates US Retail Sales data. Despite both sets of data signalling weakness for the respective currencies, the US Dollar is coming out on top overall, pushing the USD/CAD pair higher.
The USD/CAD pair trades in the 1.32s during the US session.
Canadian Dollar news and market movers
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The Canadian Dollar weakens against the US Dollar after the release of Canadian Consumer Price Index (CPI) data and US Retail Sales data for June.
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Headline CPI in Canada registered a 2.8% rise in June, which was below the 3% forecast and the 3.4% registered in May. On a monthly basis inflation rose 0.1% from 0.3% forecast and 0.4% in May. Core CPI registered a 0.1% rise in the month of June, unchanged from May.
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Bank of Canada (Boc) Core Canadian CPI (excluding volatile Food and Energy) came out at 3.2% YoY in June against the 3.5% estimated from 3.7% YoY in May. On a monthly basis, the measure showed a fall in prices of 0.1% when a 0.5% increase had been forecast by economists from the 0.4% seen in May.
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The considerable decline in BoC core inflation is the main reason for CAD’s sell-off (bullish for USD/CAD) as it reduces the chances the Bank of Canada (BoC) will raise interest rates at its September meeting. Since higher interest rates are supportive for the local currency, because they attract greater inflows of foreign capital, the opposite is true of lower inflation.
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US Retail Sales also dissapointed, however, coming out at 0.2% versus forecasts of 0.5% in June from 0.3% in May. Retail Sales Ex Autos showed a rise of 0.2% too, from 0.3% forecast. Only Retail Sales Control Group witnessed a higher-than-expected result, climbing 0.6% compared to the -0.3% decline expected.
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The overall lower Retail Sales data suggests consumers in the US are starting to reign in their spending which will probably reduce inflation. This makes it less likely the US Federal Reserve (Fed) will have to raise interest rates considerably higher to bring inflation under control – especially given with the softer CPI and PPI data from last week. Overall this paints a picture of a US economy that is already cooling off.
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Friday saw a strong reversal in USD/CAD on the back of a combination of weaker Crude Oil prices, which weighed on CAD, and much better-than-expected Michigan Consumer Sentiment data out of the US, which supported the US Dollar.
Canadian Dollar Technical Analysis: Monday’s weak close disappoints bulls
USD/CAD is in a long-term uptrend on the weekly chart, which began at the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within that uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities of an eventual continuation higher marginally favor longs over shorts.
USD/CAD appears to have completed a large measured move price pattern that began forming at the March highs. This pattern resembles a 3-wave ABC correction, in which the first and third waves are of a similar length (labeled waves A and C on the chart below).
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US Dollar vs Canadian Dollar: Weekly Chart
A confluence of support situated in the upper 1.3000s, which is made up of several longer moving averages and a major trendline, prevented last week’s decline from extending any lower and provided a foundation for the reversal on Friday and Monday.
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US Dollar vs Canadian Dollar: Daily Chart
The long green up-bar that formed on Friday is a bullish engulfing Japanese candlestick reversal pattern. When combined with the long red down bar that formed immediately before it the two together complete a two-bar bullish reversal pattern.
However, Monday’s weak close has brought into doubt the bullish conviction in the reversal and failed to confirm the bullish engulfing.
It will take a decisive break above the 50-day Simple Moving Average (SMA) at circa 1.3400 to refresh and reconfirm the USD/CAD long-term uptrend. Nevertheless, bulls marginally have the upper hand, with the odds slightly favoring a recovery and a continuation higher.
Only a decisive break below 1.3050 would indicate the thick band of weighty support in the upper 1.30s has been definitively broken, bringing the uptrend into doubt.
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.
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