Canadian Dollar weakens as Oil prices ease after Trump remarks
- Canadian Dollar weakens as Oil prices trim gains after Trump signaled plans to waive oil-related sanctions.
- Trump predicted the war with Iran would end “very soon” amid mounting economic and political pressures.
- The International Energy Agency reportedly discussed a coordinated release of emergency Oil reserves among member countries to stabilize markets.
USD/CAD edges higher after two days of losses, trading around 1.3600 during the Asian hours on Tuesday. The pair strengthens as the commodity-linked Canadian Dollar (CAD) weakens after Oil prices trimmed earlier gains following remarks from US President Donald Trump that he plans to waive oil-related sanctions.
West Texas Intermediate (WTI) crude trades around $83.60 per barrel at the time of writing, retreating from $113.28 touched in the previous session. Trump also said the war with Iran could be resolved “very soon,” as he faces mounting economic and political pressure after days of sharp volatility in Oil markets.
Meanwhile, the International Energy Agency (IEA) reportedly discussed a coordinated release of emergency oil reserves among member countries on Monday to stabilize markets. Such a move could temporarily boost supply and help prevent a sharp surge in Oil prices.
The US Dollar Index (DXY) remains below 99.00 on Tuesday after a sharp intraday drop in the previous session, as hopes for a quick resolution to the Iran conflict reduced safe-haven demand for the currency. Traders are awaiting key US inflation data, including the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index, due later this week for fresh signals on the Federal Reserve’s policy outlook.
Additionally, the yield on the US 10-year Treasury bond trades around 4.11% at the time of writing, easing from 4.21% reached on Monday, as traders pushed back expectations for the Federal Reserve’s (Fed) next rate cut, with the first reduction now anticipated in July. According to the CME Group’s FedWatch Tool, markets currently price in a 43% probability of a Fed rate cut in July.
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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