Canadian Dollar gathers strength amid doubts over US-Iran ceasefire
- USD/CAD softens to around 1.3655 in Wednesday’s Asian session.
- Trump announced he was extending a ceasefire with Iran indefinitely, a day before it was set to expire.
- US Retail Sales climbed 1.7% MoM in March, hotter than expected.
The USD/CAD pair trades on a weaker note near 1.3655 during the Asian trading hours on Wednesday. Tensions in the Strait of Hormuz provide some support to the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD).
US President Donald Trump said he will extend the ceasefire with Iran until talks between the two countries have progressed. In a Truth Social post, Trump stated that he would maintain a blockade over ships coming to and from Iran in the Strait of Hormuz.
A White House official confirmed in a statement that the US Vice President JD Vance’s trip to Pakistan would not take place on Tuesday. Uncertainty surrounding the US-Iran peace talks could underpin the Canadian Dollar (CAD) in the near term. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.
On the other hand, hotter-than-expected US Retail Sales data might help limit the Greenback’s losses. Retail Sales in the United States (US) rose 1.7% MoM in March, according to the US Census Bureau on Tuesday. This figure followed the 0.7% increase (revised from 0.6%) seen in February and came in above the market consensus of 1.4%. On a yearly basis, Retail Sales jumped 4.0% in March, matching February's print.
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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