On Wednesday, the loonie fell by 0.15%. This would represent an extension of its recent pattern of declining against the US Dollar. As the Loonie endures another self inflicted black eye. Yet it has continued to battle fiercely to keep its position in the international reserve currency market. The currency has already fallen by 90 percent against the American dollar. This most recent trend has now happened seven of the last eight trading days. Speculative traders are betting heavily against the eurozone. At the same time, the USD/CAD pair has shot up to 1.3860, underlining yawning fears over local and global economic prospects.
Petroleum, Canada’s biggest export by far, has a huge influence on the value of the Canadian Dollar. As oil prices go up or down, the strength of the Loonie follows suit almost in parallel. Perhaps most importantly, the overall health of the US economy is a key supportive factor for the currency in the current environment. Observers attribute this perfect storm of factors to the particularly difficult salting condition on the Canadian Dollar. In consequence, the currency has seen major devaluation over the last months.
Ongoing Decline Against the US Dollar
The most recent trading session only made matters worse, putting more pressure on the Canadian Dollar’s bearish path. On Wednesday, it dropped further, down about one-sixteenth of one percent. The CAD/USD pair has risen by over a percentage point. This increase comes after its recent swing low 1.3726, hit at the end of August. The Canadian Dollar continues to lose ground. This trend further underscores its fight to recover lost ground against the US Dollar.
Market participants are understandably eyed this development with trepidation. They note that the CAD has several important economic indicators that are threatening its future success. The yet-to-be-released US Consumer Price Index (CPI) inflation report carries enormous weight. More traders expected inflation gauges to start climbing back up again in August. This adjustment would have a profound effect on the relationship between the two currencies.
Market Sensitivity to Economic Indicators
The recent swings in the Canadian Dollar highlight our volatility on economic data releases, and more importantly, external market forces. With a minimal Canadian data docket this week, traders will be watching developments from the United States with keen interest. They are particularly focused because they look forward to next week’s Federal Reserve call on interest rates. That’s because the US economy is fundamentally intertwined with Canadian dollar performance. When US economic data surprises, it frequently compounds the re-pricing into CAD appreciation.
The USD/CAD pair is now coming up against its important 200-day Exponential Moving Average (EMA), situated just below the 1.3871 level. The RSI is one of the most widely-used technical indicators and a key point of reference for traders. In the process, they look for evidence of reversals or the trend continuing. This key level is being retested and so quickly, showing a very active short-term trading market. Traders have been showing interest regarding how this level holds up under the weight of the market.
Future Outlook for the Canadian Dollar
Looking forward, analysts are watching the clouds overhead, and exploring what role outside factors will play on the Cdn$’s performance in the coming weeks. Oil prices and the Canadian dollar (CAD) are inextricably linked. Any major changes in crude oil would have an immediate impact on our exports—Canadian or otherwise. Furthermore, investor sentiment towards US inflation data will crucially influence how they trade the USD/CAD pair going forward.
As the release of more economic signals looms, traders continue to tread lightly amidst concern over sustained volatility. Many central bankers believe key inflation metrics will continue to climb. That would risk forcing the Federal Reserve into a more hawkish stance on interest rates. If this happens, it will create even more downward pressure on a beleaguered Canadian Dollar, which is already trying to steer through stormy seas.