The Canadian Dollar (CAD) experienced a slight recovery on Friday against major currency peers, but trading remains thin as market flows struggle to find interest in the CAD. Despite an upside beat in Canadian Gross Domestic Product (GDP) growth, the Canadian Dollar failed to generate a meaningful bullish bid against the US Dollar. Canada will soon enter a long weekend, resulting in even thinner trading volumes next week, especially with a looming rate cut expected from the Bank of Canada (BoC).
The Canadian GDP in the second quarter exceeded expectations, with a 0.5% increase compared to the previous 0.4%. The annualized Canadian Q2 GDP also saw a jump to 2.1% from the previous 1.8%, surpassing the expected decrease to 1.6%. However, the month-on-month GDP stumbled, printing at a flat 0.0% compared to the previous 0.2%. Global markets are preparing for a quiet week ahead with both CAD and USD markets closed for the long weekend. The BoC is anticipated to deliver another 25 bps rate trim next Wednesday, reducing the main reference rate to 4.25%.
The Canadian Dollar price forecast suggests a possible pullback as USD/CAD hovers around the midrange on Friday, possibly rebounding towards the 200-day Exponential Moving Average (EMA). Key factors driving the Canadian Dollar include BoC interest rates, the price of Oil, the health of the Canadian economy, inflation, trade balance, and market sentiment. The US economy, as Canada’s largest trading partner, also influences the CAD.
The Bank of Canada plays a crucial role in influencing the Canadian Dollar by setting interest rates that affect credit conditions. The BoC aims to maintain inflation between 1-3% by adjusting interest rates. Higher interest rates tend to be positive for the CAD, while quantitative easing and tightening strategies can also impact the currency. The price of Oil is another significant factor affecting the Canadian Dollar, as Oil is Canada’s largest export. Higher Oil prices usually result in a stronger CAD.
Traditionally, inflation was seen as negative for a currency, but in modern times, higher inflation can attract more global investors seeking lucrative investment opportunities. Macroeconomic data releases, including GDP, manufacturing and services PMIs, employment reports, and consumer sentiment surveys, also influence the direction of the CAD. A strong economy is generally positive for the Canadian Dollar as it attracts foreign investment and may lead to higher interest rates, strengthening the currency. On the other hand, weak economic data can lead to a decline in the CAD.
