The Canadian Dollar, or the Loonie as it’s known, is surging. It has recently fluctuated between 1.3960 – 1.3965 USD. The USD/CAD pair, after two days of declines, was up 0.10% on the day. Currently, it’s testing the 1.3940 to 1.3935 area. Analysts warn that the potential upside for the Canadian currency looks to be capped given a still uncertain economic landscape.
That’s because Canada’s economy relies heavily on its petroleum exports. These exports play a central role in determining the value of the Loonie. As international oil prices rise and fall, these changes are quickly reflected in the value of the Canadian Dollar. As Reader’s Digest might say, the prices were up, they were down—oh boy were they down. Demand for Loonie, consequently, increased making it stronger in opposition to the increasing oil prices.
Economic Indicators and Their Impact
One more piece of Canadian data—the Canadian Ivey Purchasing Managers’ Index (PMI)—will be released later today, in the middle of the North American session. This Jobs report can take the Loonie’s bullish momentum further. The index is one of the most important all around indicators of economic health and reflects increases and decreases in business purchasing activity in Canada. A higher than anticipated PMI would help to strengthen confidence in the overall Canadian economy and prove further Loonie demand.
The strength of the US economy affects the value of the Canadian Dollar just as much. The U.S. is Canada’s second largest trading partner. As a result, activity and economic conditions there are highly influential of the Canadian export outlook and thus the fortunes of the loonie. Recent signals that the US labor market is slowing have alarmed many. Challenger Job Cuts and Weekly Initial Jobless Claims coming in the next few days will give more texture to this change.
Besides the correlation of each country’s economies, the US Federal Reserve Board’s monetary policy decisions have immediate impacts on the Canadian Dollar. Market expectations are high that the Federal Reserve will reduce borrowing costs for a third time next week. This prospective action comes on the heels of indications of a U.S. economic softening. Such a counter move would probably weaken the US Dollar, which would indirectly strengthen the Loonie.
Oil Prices and Currency Dynamics
Soaring oil prices would have a major impact, boosting the value of the Canadian Dollar. The reason this connection is so powerful is that Canada is already the world’s 4th largest oil producer. This is because an increase in crude oil prices usually is not supportive of the Loonie since it strengthens demand for Canada’s main commodity exports. Recent ups and downs in oil prices have led many to query whether these increases are sustainable and what the long-term effects will be on Canada’s economy.
Oil prices have stayed high. At some point, a big enough decline would pose real stress on the Canadian economy and would put downward pressure on the loonie. A strong CAD usually means there’s high demand for CAD, either by virtue of great economic fundamentals or an uptick in commodity prices. Yet, if oil prices were to stumble, they might impose a significant direction on the Loonie’s performance versus its US counterpart.
Market Sentiment and Future Outlook
Despite these positive developments, market sentiment is still pessimistic about the Canadian Dollar’s prospects moving forward. In particular, the USD/CAD pair hit a nearly one-month low last week, underscoring continued volatility and uncertainty in currency markets. Traders are paying particular attention to other economic indicators from Canada and the US to figure out which way they’ll be heading next.
We know that economic conditions are always dynamic. Given the oil-dependent nature of Canada’s economy, investors shouldn’t ignore the influence of both oil price movements and central bank policy shifts on the Loonie’s path. The interplay between Canada’s commodity-driven economy and its dependence on US economic health will continue to shape currency movements in the near term.