The Canadian Dollar, or Loonie, has been the most resilient currency in recent trading sessions. It has been the most stable and mostly just rangebound in the mid-1.4000s against the US Dollar. This stability comes from a heady combination of human and economic factors. Major contributors are strength in the US economy, rising oil prices, and Canada’s inflation indicators. While Canadian dollar — or Loonie — is flat so far. Looking at the bigger picture, analysts insist that its downside potential is severely limited by today’s economic landscape.
The state of the Canadian economy is a huge driver of the value of its currency, and petroleum makes up a big chunk of Canadian exports. It’s no wonder then that in the foreign exchange markets, fluctuations in oil prices directly impact Loonie’s performance. The Canadian Dollar is considered a commodity-linked currency. Instead, it frequently increases or decreases as global oil prices increase or decrease, mixing and muddying its anticipated impact on the USD/CAD trading pair.
Economic Interdependencies
The connection between the value of the US and Canadian economies is tremendously important in crafting the value of the Loonie. Economic data releases from the United States, particularly indicators like Nonfarm Payrolls, can have immediate consequences for the Canadian Dollar. Normally, when US job growth beats expectations like this, it’s USD-supportive on the surface. This increase tends to place downward pressure on the Loonie.
Whenever the US economy shows any signs of weakening, it tends to strengthen the Loonie’s position. Especially during times of economic uncertainty, investors flock to the safety of stable currencies. As a result, this behavior can create a higher demand for the Canadian Dollar. Market participants hang on every tick of US economic data. They are eager to learn what all of these changes and processes will mean for CAD values.
Impact of Oil Prices
Oil is central to the “build, baby, build” ethos that dominates Canada’s political landscape. As the largest exporter of petroleum, Canada heavily relies on oil revenues to support its economy and sustain the value of its currency. When global oil prices increase, the Canadian Dollar assumes increased revenue’s robustening economic prospects usually lead to further appreciation. A softer sentiment towards crude oil prices would put downward pressure on the Loonie.
Crude oil prices continue to play an important role in determining the Canadian Dollar’s performance. Now, as market experts begin to notice oil prices heightening again, questions are being asked about the re-depreciation of the Loonie. The currency and oil price link means it’s all the more important to watch global oil market trends.
Inflation Trends
In fact, new reports indicate that Canada’s inflation rates have begun to decelerate. Last month the headline Consumer Price Index (CPI) fell from 2.4% YoY to 2.2%. The new rate blew past analysts’ predictions of 2.1% by a wide margin. This points to continued inflationary pressures that are proving to be stubbornly persistent, despite the recent drop.
Given the importance of inflation data to guiding the Bank of Canada’s monetary policy levers, it further weighs on investor sentiment toward the Loonie. Now, more than ever, inflation rates are being scrutinized. Even slight departures from what everyone expects can wreak havoc on the currency markets. In this vein, the recent CPI figures likely do more to foster a dovish view on future Canadian Dollar price action.