WTI holds gains: Why the Canadian Dollar is struggling?
- USD/CAD rises as safe-haven demand boosts the US Dollar, offsetting the Canadian Dollar's gains from higher oil prices.
- WTI rises on renewed supply concerns following US "self-defense strikes" in southern Iran on Monday.
- The CME FedWatch tool shows markets pricing a 41% chance of a 25-basis-point Fed rate hike by year-end.
USD/CAD inches higher after registering minor losses in the previous day, trading around 1.3810 during the Asian hours on Tuesday. The commodity-linked Canadian Dollar (CAD) is struggling against the US Dollar (USD), as rising risk aversion offsets any gains from higher crude oil prices. It is important to note that Canada is one of the world's largest producers and exporters of crude oil, with its energy sector making up a massive portion of its economy.
West Texas Intermediate (WTI) oil price gains ground after four days of losses, trading around $91.50 per barrel at the time of writing. Crude oil prices advance on renewed supply concerns after the United States (US) forces conducted "self-defense strikes" in southern Iran on Monday.
The US Central Command spokesperson said that the strikes targeted missile launch sites and Iranian vessels attempting to deploy mines. While the US military emphasized its commitment to protecting its forces and maintained that it is still exercising restraint during the ceasefire, US President Donald Trump stated that negotiations for a deal to end the conflict and reopen the Strait of Hormuz were "proceeding nicely."
Moreover, the USD/CAD pair holds ground as the US Dollar remains steady, backed by safe-haven flows from geopolitical tension and expectations of a hawkish Federal Reserve outlook. According to the CME FedWatch tool, market participants are now pricing in a nearly 41.0% probability that the Fed will implement a 25-basis-point interest rate increase by the end of the year. Traders are likely awaiting the upcoming PCE inflation data for clearer signals on the Fed’s future policy path.
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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