Canadian Dollar strengthens as US-Iran ceasefire talks weigh on US Dollar
- USD/CAD declines as the US Dollar softens on improved market sentiment.
- US and Iran received a two-step ceasefire plan, but Tehran refuses to reopen the Strait of Hormuz temporarily.
- Iran plans tanker tolls in the Persian Gulf, easing BoC hawkish sentiment tied to energy shock concerns.
USD/CAD depreciates as the US Dollar (USD) eases amid improved market sentiment following the reports, suggesting prospects for a ceasefire in the Middle East. The pair trades around 1.3920 during the European hours on Monday.
Reuters cited a source, suggesting that the United States (US) and Iran have received a proposed framework to end hostilities, outlining a two-step plan with an immediate ceasefire followed by a broader agreement. Pakistan's army chief, Field Marshal Asim Munir has reportedly been in continuous contact with US Vice President JD Vance, special envoy Steve Witkoff, and Iranian Foreign Minister Abbas Araghchi. However, Tehran stated it would not reopen the Strait of Hormuz under a temporary ceasefire arrangement.
The downside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) may struggle amid easing oil prices. Crude oil prices eased after the Bloomberg cited an Axios report, suggesting that the US, Iran, and regional mediators are discussing terms for a potential 45-day ceasefire after a day US President Donald Trump threatened to rain "hell" on Tehran if it did not make a deal.
Iranian media reported that officials are working on plans to impose a toll on tankers exiting the Persian Gulf. This eased fears that an energy shock would intensify inflation and compel the Bank of Canada (BoC) to keep rates restrictive for longer.
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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