Canadian Dollar bulls seem hesitant as Hormuz risks aid USD and offset positive Oil prices
- USD/CAD struggles to capitalize on its gains registered over the past two days amid mixed cues.
- The Hormuz standoff supports the safe-haven USD, while rising Oil prices underpin the Loonie.
- The divergent Fed-BoC policy expectations also contribute to capping the upside for spot prices.
The USD/CAD pair retreats a few pips from a three-day high touched during the Asian session on Thursday, though it lacks follow-through amid mixed fundamental cues. Despite a temporary extension of the US-Iran ceasefire, a standoff over the Strait of Hormuz supports the safe-haven US Dollar and the currency pair. However, rising Crude Oil prices underpin the commodity-linked Loonie and cap spot prices.
US President Donald Trump announced on Tuesday that he would indefinitely extend the ceasefire with Iran, hours before it was set to expire, and reiterated that the US Navy blockade of Iranian ports will continue. Iran, on the other hand, has set the removal of the US naval blockade as a strict precondition for resuming negotiations. Furthermore, Iran's Revolutionary Guard said that it fired on three vessels and seized two in the Strait of Hormuz. This keeps geopolitical risks in play and assists the USD in preserving its gains registered over the past two days, which, in turn, is seen as lending support to the USD/CAD pair.
The USD, however, lacks bullish conviction amid fading hawkish US Federal Reserve (Fed) expectations and renewed bets for a rate cut by the year-end. In contrast, money markets have been pricing in the possibility of a rate hike by the Bank of Canada (BoC) in April. Furthermore, persistent signs of friction between the US and Iran push Crude Oil prices higher for the third straight day, which, in turn, is seen benefiting the Canadian Dollar (CAD) and keeping a lid on the USD/CAD pair. This makes it prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out in the near term.
Market participants now look forward to the US economic docket, featuring the release of the usual Weekly Initial Jobless Claims data and the flash PMIs later during the North American session. The data could drive the USD demand, which, along with Oil price dynamics, should provide some impetus to the USD/CAD pair. The focus, however, will remain glued to geopolitics, which might continue to infuse volatility across the global financial markets and contribute to producing some meaningful trading opportunities.
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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