Canadian Dollar bucks post-BoC rate cut
- The Canadian Dollar pared losses on Wednesday to rebound 0.2%.
- The Bank of Canada trimmed interest rates by another 50 bps.
- Weakening economic figures and labor data sparked another uptick in rate cuts.
The Canadian Dollar (CAD) bounced on Wednesday, regaining one-fifth of one percent against the Greenback and meagerly recovering from recent lows. US Consumer Price Index (CPI) inflation figures came in broadly as-expected, keeping wider market sentiment on-balance and giving Loonie traders an opportunity to claw back chart paper.
The Bank of Canada (BoC) delivered another outsized interest rate cut, slashing reference rates by 50 basis points. With Canada’s Unemployment Rate hitting multi-year highs, the BoC has been given all of the ammunition it needs to shrug off recent upticks in inflation figures and start delivering further relief to its darling industry, the Canadian mortgage sector. Real estate accounted for roughly 20% of Canada’s overall economy in 2023, and the BoC is hard-pressed to keep housing activity afloat after shock rises in interest rates following the COVID pandemic sent housing costs through the roof.
Daily digest market movers: CAD bounces on BoC rate cut
- The BoC cut Canada’s main interest rate to 3.25% on Wednesday, delivering a 50 bps rate trim.
- The Canadian Dollar bounced on the news, giving Loonie traders hope for a technical recovery.
- Broader market sentiment remains on-balance after US CPI inflation figures matched market expectations across the board.
- Despite CPI figures nailing forecasts, investors will have little to celebrate with headline US CPI inflation accelerating to 2.7% YoY in November, up from the previous period’s 2.6%.
- Meaningful Canadian economic data is done on the release calendar for this week, leaving the Loonie at the mercy of wider market flows for the back half of the trading week.
Canadian Dollar price forecast
Despite a firm bid in the Canadian Dollar post-BoC, bullish flows into the CAD remain limited, and markets pared away much of Wednesday’s intraday gains. Momentum is firmly tilted into the Greenback side on the USD/CAD chart, with the pair barely easing from multi-year highs near the 1.4200 handle.
Loonie bulls will be looking to drag the pair down to 1.4100 before making a break lower toward the 50-day Exponential Moving Average (EMA) near 1.3930.
USD/CAD daily 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.