…And the Canadian Dollar (CAD), which just hit a multi-year high! It jumped 2.26% against the US Dollar (USD) over a period of two days. Given this increase in prices, the USD/CAD exchange rate recently fell under the important 200-day Exponential Moving Average (EMA) just above 1.4075. That’s the first time it has been below that level since last October. As of Thursday, the CAD reached a four-month high. This increase was spurred by a confluence of events including climbing oil prices, escalating interest rates set by the Bank of Canada (BoC) and robust macroeconomic data.
The Bank of Canada plays a key role in determining the value of the Canadian Dollar. It does this primarily through its interest rate policies. Through the oversight of interest rates, the BoC is expected to control inflation within a target band of 1-3%. A healthy economy usually bodes well for the Canadian Dollar, but current signs point to some softness, potentially keeping CAD down in the near-term.
Factors Influencing the Canadian Dollar
The Loonie is one of the most interest-rate sensitive currencies, and is affected notably by oil prices as well. The BoC’s monetary policy has direct impact on banks’ lending practices. This, in turn, has a ripple effect on consumer spending and investment. Lower interest rates further incentivize borrowing and spur spending. This increase in economic activity can help create more robust economic growth, and ultimately a stronger Canadian dollar (CAD).
Moreover, oil prices have a strong multiplier effect on Canada’s economy as oil is Canada’s largest export. Higher oil prices automatically strengthen the CAD by increasing the Trade Balance—their exports minus imports. When oil prices go up, Canada’s royalty and export revenues increase, which pushes up the value of the Canadian Dollar relative to others.
Additionally, the overall health of the US economy is extremely important when deciding CAD’s value. Because the US is Canada’s largest trading partner by a long shot, changes in the US economy have immediate and direct effects on Canadian exports and imports. Robust US economic data tends to boost demand for Canadian exports, thus providing a tailwind for the CAD.
Recent Trends in Interest Rates and Economic Data
Recent macroeconomic data releases, which came in stronger than expected, tempered recession fears and contributed to the buying pressure for the CAD. Indicators such as Gross Domestic Product (GDP), Manufacturing and Services Purchasing Managers’ Indices (PMIs), employment figures, and consumer sentiment surveys all provide insights into economic health. With the Canadian economy now flashing signs of weakness, this dismal downturn could make the Bank of Canada think twice about future interest rate hikes.
Even with these concerns, the BoC’s commitment to keeping inflation in check continues to increase overall confidence in the CAD. Analysts argue that as long as inflation remains in the target range it will support the Canadian Dollar. This may cause the currency to strengthen even more in the months ahead.
It is not just economic indicators that decide a currency’s value. Global geopolitical events and market sentiment are critical in determining currency values. Traders closely monitor developments in trade policies and tariffs that could impact economic relationships between Canada and its trading partners.
Impact of Oil Prices on the Canadian Economy
Oil prices have been rising lately, providing a further boost to the value of the Canadian Dollar. Since oil is still the foundation of Canada’s export economy, when prices go up, revenues from exports often go up as well. As a result, this keystone keeps the conditions ripe for a Trade Balance to blossom.
When oil prices are high, the Trade Balance looks much more favorable. The increase raises revenues to governments through taxes and royalties paid on oil production. This new pool of capital can drive even more economic activity right here in Canada, creating a ripple effect of new consumer spending and business investment.
Yet rising and falling oil prices lead to an uncertain economy for Canadians. Only global supply disruptions or geopolitical flare-ups lead to sudden declines in the price of oil. If this trend continues it could have corrosive effects on the CAD by increasing the Trade Balance deficit. Traders closely watch these developments as they become a key input into expectations for where currencies are likely to move in the future.