Canadian Dollar inches higher as fading risk aversion weighs on US Dollar
- USD/CAD holds losses as the US and Iran signed a preliminary deal to end hostilities, easing safe-haven demand.
- The US Dollar may regain as half of the FOMC members expect at least one rate hike this year.
- An upside in oil prices might provide some support to the commodity-linked Canadian Dollar.
USD/CAD inches lower after five days of gains, trading around 1.4100 during the Asian hours on Thursday. The pair holds losses as the US Dollar (USD) slips on easing safe-haven demand following the BBC report late Wednesday, indicating that the White House confirmed that US President Donald Trump and Iranian President Masoud Pezeshkian signed a preliminary memorandum of understanding designed to end the US-Israel war on Iran. This decisive executive action follows the electronic signing of the initial framework by U.S. Vice President JD Vance and Iranian Parliamentary Speaker Mohammad Bagher Ghalibaf earlier in the week.
However, the USD/CAD pair may regain its ground as the US Dollar could rebound on rising odds of rate hikes by the Federal Reserve (Fed) later this year. The Fed’s June Summary of Economic Projections showed half of FOMC members expect at least one rate hike this year. Despite economic disruptions linked to the conflict in Iran, resilient labor market data and persistent underlying inflation measures continue to drive tightening pressures.
The Federal Open Market Committee (FOMC) voted unanimously to maintain its benchmark federal funds rate in the range of 3.5% to 3.75%. In his first meeting since taking the helm of the US central bank, the newly appointed Federal Reserve Chairman, Kevin Warsh, vowed to aggressively restore price stability.
Additionally, the USD/CAD pair holds losses as the commodity-linked Canadian Dollar (CAD) might receive some support from higher oil prices. West Texas Intermediate (WTI) oil price holds gains around $75.10 per barrel at the time of writing. However, Crude oil prices may face challenges from easing Middle East tensions and supply concerns, along with the rising odds of Fed rate hikes by the end of 2026.
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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