Canadian Dollar remains flat as oil prices ease
- Canadian Dollar steadies as Oil prices ease slightly after surging more than 9% on Thursday.
- WTI price may rise further after the Strait of Hormuz closure amid escalating US-Israel-Iran tensions.
- January’s US Personal Consumption Expenditures Price Index will be eyed later on Friday.
USD/CAD steadies after registering over 0.25% gains in the previous session, trading around 1.3640 during the Asian hours on Friday. However, the commodity-linked Canadian Dollar (CAD) may strengthen amid surging oil prices, as Canada is the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) oil price eased slightly after surging more than 9% in the previous session, trading near $95.00 per barrel at the time of writing. However, oil prices may continue to rise following the effective closure of the Strait of Hormuz amid escalating conflict involving the United States, Israel, and Iran.
US crude prices have climbed more than 40% since the start of the war. The International Energy Agency (IEA) warned that the US-Israeli war on Iran is “creating the largest supply disruption in the history of the global oil market.”
Iran’s new supreme leader, Mojtaba Khamenei, said in his first public remarks since his appointment that the closure of the Strait of Hormuz should continue as a “tool to pressure the enemy.” Khamenei also warned that all US military bases in the region should be closed immediately or face potential attacks.
The downside of the USD/CAD pair could be restrained as the US Dollar (USD) may hold its ground as futures markets and economists expect the Federal Reserve to keep interest rates unchanged at next week’s policy meeting, with the benchmark federal funds rate currently at 3.50%–3.75%.
Meanwhile, traders await another key US inflation release. January’s Personal Consumption Expenditures Price Index (PCE) — the Fed’s preferred inflation gauge — is due later in the day, though it will not reflect the impact of the Iran war. Markets will also monitor the first revision of fourth-quarter US GDP growth and March consumer confidence.
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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