Canadian Dollar remains subdued as USD gains on hawkish Fed expectations
- USD/CAD gains as rising hawkish Fed expectations support the US Dollar.
- Geopolitical disruptions in the Strait of Hormuz threaten to fuel US inflation, boosting higher Fed rate expectations.
- The commodity-linked CAD weakens as oil prices ease on rising hopes for a US-Iran diplomatic agreement.
USD/CAD remains stronger for the fourth consecutive day, hovering around 1.3790 during the early European hours on Friday. The pair holds ground as the US Dollar (USD) receives support from rising odds of hawkish sentiment surrounding the Federal Reserve (Fed) policy stance.
Traders are pricing in rising expectations that the US Federal Reserve (Fed) will keep interest rates higher, which could be attributed to the prolonged energy crisis linked to the Strait of Hormuz disruption threatening to feed into core US consumer prices and inflation expectations.
Fed officials are currently holding the federal funds rate steady, and policymakers are moving away from the idea of rate cuts and are increasingly open to raising rates if inflation fails to cool down.
US President Donald Trump will swear in Kevin Warsh as the chair of the US Federal Reserve on Friday at the White House. The new chair succeeds Jerome Powell, whose term expired on Friday but who has continued to serve on a pro-tempore basis until the transition.
The commodity-linked Canadian Dollar (CAD) struggles against the US Dollar (USD) amid lower oil prices, given Canada’s status as the largest crude exporter to the United States (US). West Texas Intermediate (WTI) oil price declines for the third successive day, trading around $96.80 at the time of writing.
Crude oil prices ease on easing supply concerns amid growing optimism that the United States (US) and Iran could eventually reach an agreement. US Secretary of State Marco Rubio noted there were some encouraging signs surrounding a possible deal with Iran. Meanwhile, senior Iranian officials clarified that no deal has been officially reached with the United States, but they acknowledged that the gaps between the two nations have narrowed.
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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