- The DXY index surged, trading with gains above the 200-day SMA at 103.70.
- Growing tensions between Israel and Hamas made investors seek refuge in the USD.
- Key US economic reports due this week: ISM Services PMI, ADP Employment Change, November Nonfarm Payrolls and the Unemployment Rate.
The US Dollar (USD) edged higher on Monday, with the Dollar Index (DXY) sailing past the 103.70 mark, above the 200-day Simple Moving Average (SMA) and pushing a sour market mood amid rising Treasury yields.
For the rest of the week, key drivers are on the horizon as investors eye Friday’s release of Nonfarm Payrolls for November alongside the Unemployment Rate, while the ISM Services PMI is due on Tuesday and the Automatic Data Processing (ADP) Employment Change report on Wednesday.
Despite mixed signals from the US labour market and cooling inflation in the United States economy, Federal Reserve (Fed) officials indicated a possibility for further policy tightening, signifying a subtly hawkish stance. This week’s key labour market data will influence the modelling of expectations and the Fed’s policy trajectory, which could define the short-term trajectory of the US Dollar.
Daily Market Movers: US Dollar on the rise ahead of labor market data
- The US Dollar is currently trading with gains, with the DXY Index showing a positive upward trend neatly tucked above 103.70.
- The US Dollar’s upward trend appears largely driven by a sour market mood and rising bond yields.
- No significant reports have surfaced during the session that could impact the US Dollar’s current trajectory.
- Market participants have their eyes set on key economic reports due this week. On the list are the Nonfarm Payrolls, the Unemployment Rate, ADP Employment Change and the ISM Services PMI updates, scheduled for release on Friday, Wednesday and Tuesday, respectively.
- Overall, all reports are expected to show that the job creation picked up in November, while the ISM Services PMI is seen accelerating regarding its last reading of October.
- US bond yields are edging higher, aligning with the Dollar’s uptick. Specifically, the 2, 5 and 10-year yield rates are up, trading at 4.65%, 4.24%, and 4.29%, respectively.
- The CME FedWatch Tool indicates no hikes are priced in for the upcoming December meeting, and markets speculate on rate cuts in mid-2024.
Technical Analysis: US Dollar struggles amid negative territory RSI and subdued SMAs
The indicators on the daily chart are reflecting a predominance of selling momentum. The index position, below the 20 and 100-day Simple Moving Averages (SMAs), indicates that the bears are maintaining control. This control is also noticeable from the Relative Strength Index (RSI), which shows a positive slope but remains in negative territory. This reveals that although buyers are gaining some strength, they are yet to overpower the sellers.
Meanwhile, the Moving Average Convergence Divergence (MACD) signifies decreasing red bars, adding further evidence of shrinking selling momentum. This deceleration is credited to the bears taking a breather after driving the index to its lowest level since last August.
Support levels: 103.60, 103.30, 103.15, 103.00.
Resistance levels: 104.10 (20-day SMA), 104.40 (100-day SMA), 104.50.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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