Canadian Dollar gains traction on rising oil prices as US-Iran war escalates
- USD/CAD weakens to around 1.4060 in Thursday’s early European session.
- Escalating US-Iran tensions and fresh Houthi threats boost the commodity-linked Loonie.
- Money markets are now pricing in a 26% chance of a rate hike from the Fed’s July policy meeting.
The USD/CAD pair attracts some sellers to near 1.4060 during the early European trading hours on Thursday. A rise in crude oil prices provides some support to the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Traders brace for Canada’s Retail Sales data, which will be released later on Thursday.
Crude oil prices continued to surge amid rising tensions in the Middle East. Iran-backed Houthi militants targeted two Saudi oil tankers in the Red Sea, raising fears of potential supply disruptions.
On Thursday, US President Donald Trump warned the US would target Iranian infrastructure if attacks on vessels in the Strait of Hormuz continued. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
Traders continue to gauge prospects for more hawkish US Federal Reserve (Fed) policy measures. “The probability of a July hike was back up to 26% by [Tuesday’s] close, the highest since last week’s downside surprise in the U.S. CPI print,” said Deutsche Bank’s Jim Reid. “It was at 45% the day before CPI and as low as 10% the day after.”
Market participants will keep an eye on the US S&P Global Flash Purchasing Managers Index (PMI) report due on Friday. This report could offer some hints about the economic health of American manufacturing and service sectors. In case of stronger-than-expected outcomes, this could underpin the Greenback against the CAD in the near term.
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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