Canadian Dollar stands firm on elevated Oil prices; USD/CAD struggles below 1.3600
- USD/CAD remains depressed amid a further USD slide, though the downside seems cushioned.
- Elevated Oil prices fuel inflationary concerns, lifting hawkish Fed bets and supporting the USD.
- The US-Iran stalemate further limits losses for the safe-haven buck ahead of the US ISM PMI.
The USD/CAD pair extends its sideways consolidative price move through the first half of the European session and currently trades around the 1.3575-1.3570 region, or its lowest level since March 11. The US Dollar (USD) touches a two-week low and acts as a headwind for spot prices, though subdued Crude Oil prices undermines the commodity-linked Loonie and limits further losses.
Meanwhile, persistent geopolitical uncertainties due to stalled US-Iran peace talks, along with the effective closure of the Strait of Hormuz, hold back traders from placing aggressive bearish bets around Crude Oil prices. US President Donald Trump rejected an Iranian proposal to open the strategic waterway and lift the blockade, while postponing nuclear issues to a later stage. Trump further added that he's going to keep Iran under a naval blockade until the regime agrees to a deal that addresses US concerns about its nuclear program.
Moreover, reports suggest that Trump was considering military strikes to break the deadlock, with Iran threatening to retaliate against US positions in case of renewed attacks. The situation reflects failing diplomatic efforts to end the war and raises skepticism over a near-term resolution. This remains supportive of elevated Crude Oil prices, fueling inflationary concerns and bolstering bets that the Fed could keep rates unchanged well into next year. This favors the USD bulls and backs the case for the emergence of dip-buying around the USD/CAD pair.
Traders now look forward to the release of the US ISM Manufacturing PMI for some impetus later during the North American session. The key focus, however, will remain glued to developments surrounding the Middle East crisis, which might continue to infuse volatility and produce some meaningful opportunities. Nevertheless, the USD/CAD pair remains on track to register losses for the fourth consecutive week.
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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