USD/CAD bounces up and nears 1.3800 amid mixed messages on Iran
- The US Dollar bounced up from three-week lows near 1.3730 and returned to the 1.1775 area.
- The Greenback trims losses as investors ponder Trump's mixed messages on Iran.
- From a wider perspective, the pair remains aboout 1.25% below last week's highs.
The US Dollar (USD) is trimming some losses against the Canadian Dollar (CAD) on Wednesday. The pair trades at 1.3775 at the time of writing, after bouncing up from Tuesday’s lows near 1.3730, although it remains more than 1% below last week’s highs.
The US Dollar Index (DXY), which measures the value of the Greenback against a basket of peers, edges up from six-week lows as traders ponder mixed messages regarding the conflict between US and Israel, and Iran.
US President Donald Trump boosted hopes of a peaceful resolution of the conflict on Tuesday, suggesting in an interview with the New York Post that peace talks might resume in Pakistan soon.
The US military, on the other hand, affirmed that the blockade of the Strait of Hormuz has been fully implemented, a measure that was condemned by Iranian authorities as illegal and “amounting to piracy.
Beyond that, a report by the Washington Post released on Wednesday reveals that the US administration is planning to send thousands of additional troops to the Middle East in the coming days. This initiative is seen as a move to pressure Tehran to reach an agreement with the US.
In the macroeconomic domain, the US Producer Price Index (PPI) data confirmed the inflationary impact of Iran’s war. March PPI, however, was lower-than-expected, and provided some leeway to the Federal Reserve (Fed) to keep interest rates unchanged in April, awaiting further data.
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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