USD/CAD climbs as US-Iran war drives safe-haven demand, Oil prices jump
- USD/CAD rises as the US-Iran war fuels safe-haven demand for the US Dollar.
- Oil prices surge more than 5% amid concerns over potential supply disruptions through the Strait of Hormuz.
- Markets now focus on key US labor data this week, including the ADP employment and NFP report.
The Canadian Dollar (CAD) trades on the back foot against the US Dollar (USD) on Monday as the US-Iran war sparks a risk-off mood in global markets, boosting demand for the safe-haven Greenback and weighing on risk-sensitive currencies.
At the time of writing, USD/CAD is trading around 1.3680, up about 0.30%.
The risk-off move follows joint US-Israel strikes on Iran over the weekend that killed Iran’s Supreme Leader, Ayatollah Ali Khamenei. In retaliation, Iran launched missile and drone attacks targeting US military bases across several Gulf nations, fueling a wider regional conflict.
Still, the Canadian Dollar lacks strong follow-through selling as escalating tensions in the Middle East raise the risk of supply disruptions through the Strait of Hormuz, embedding a geopolitical risk premium in Oil prices and lending support to the commodity-linked Loonie.
Although Iran has not formally declared a blockade, the Islamic Revolutionary Guard Corps (IRGC) has reportedly warned ships via VHF radio that “no ship is allowed to pass” through the Strait of Hormuz.
Canada’s status as a major crude exporter makes its currency particularly sensitive to movements in Oil prices. West Texas Intermediate (WTI) climbed near $73 at the weekly open before easing during the European session. At the time of writing, WTI trades around $70.89, still up more than 5% on the day and hovering near its highest level since June 2025.
On the data front, Canada’s S&P Global Manufacturing Purchasing Managers' Index (PMI) rose to 51.0 in February, up from 50.4 in January.
In the United States, manufacturing activity remained in expansion territory in February. The ISM Manufacturing PMI eased slightly to 52.4 from 52.6 in January.
The ISM Manufacturing Employment Index rose to 48.8 from 48.1, while the New Orders Index fell to 55.8 from 57.1. Meanwhile, the ISM Manufacturing Prices Paid Index jumped sharply to 70.5 from 59.0.
Attention now turns to US labor market data due later this week, including the ADP Employment Change on Wednesday, weekly Initial Jobless Claims on Thursday, and the Nonfarm Payrolls (NFP) report on Friday.
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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