On Wednesday, the Canadian Dollar—known colloquially as the Loonie—depreciated against the US Dollar. This decrease occurred during a week with almost no economic data coming out of Canada. This decrease of slightly more than a quarter of one percent has spurred fear of a whipsaw cycle. Traders keenly focused, as the Canadian Dollar now works off of a short-term congestion zone trap against its US counterpart.
Canada’s economy is primarily dependent on the export of petroleum. Consequently, changes in oil prices easily have a tendency to affect the Canadian Dollar significantly. That being said, this week’s economic calendar has been particularly lacking for heavyweight Canadian releases. This absence of data has left traders in a state of uncertainty, particularly as they anticipate important economic indicators that could influence future movements.
Economic Landscape and Technical Analysis
In part due to the absence of any substantive Canadian economic data this week, the USD/CAD exchange rate has remained stuck in neutral. At the moment, bids are still glued to the 200-day Exponential Moving Average (EMA), which is located around 1.4030 level. This $271 technical level serves as a key resistance point for traders. It shows the strength of the trend over a much longer time period.
The USD/CAD pair is thusly constricted slightly below two fairly important technical levels with emphasis on the 1.4000 handle. The firm’s technical ceiling is defined not much higher than the present price action. This is making it even harder for US Dollar bulls to push the pair back into bullish territory. By its nature then, traders are expected to be on the defensive until more certain signals come from upcoming economic releases.
Yes, market participants are hypersensitive to the every beat of the US economy. Coming up this Thursday and Friday, US retail sales and consumer sentiment figures are due. These reports are poised to move market flows and result in substantial volatility in the performance of the Canadian Dollar. Because the US economy is so commonly the underlying driver of Canadian economic health, these reports can be extremely impactful on Loonie valuations.
Implications of Consumer Price Index Figures
Two Consumer Price Index (CPI) figures have quickly become another important factor that impacts the value of the Canadian Dollar. Here’s the Loonie traders’ lineup next week for some home-cooked mid-tier Canadian data. Eyes will be principally on the CPI numbers. These numbers provide strong and useful indicators of overall inflationary pressures in this country. They might even affect the Bank of Canada’s decisions on monetary policy.
Alternatively, a stable or increasing CPI might be interpreted as a sign of economic strength, which would strengthen the CAD relative to the USD. On the other hand, lighter-than-expected inflation prints would ramp up worries about the strength of growth, leading to greater Loonie downside. Accordingly, market participants are bracing for market-moving volatility in reaction to these releases.
As noted due to this week’s data drought, our analysts are urging everyone to stay vigilant with inflation indicators. The interaction between CPI data and overall economic movement will eventually determine market mood and drive currency trading.
Future Outlook for the Canadian Dollar
Going forward, the Canadian Dollar’s trajectory will depend on three main factors. These are global oil prices, economic data releases on the horizon and the prevailing market sentiment toward risk assets. As Canada’s largest export by dollar value, fluctuations in oil prices will always be a major deciding factor for Loonie strength.
The new congestion trap is a symptom of trader malaise in a shaky and unpredictable market environment. The 200-day EMA in recent days still provides some support for the Canadian Dollar. It’s unclear whether this support will be sufficient to push a positive trend higher against the US Dollar.
Additionally, the continued health of the US economy is another important wild card in this calculation. Any stronger-than-expected data from the US may push the US Dollar stronger, adding insult to injury to the Canadian currency.