Canadian Dollar strengthens on rising oil prices ahead of potential US-Iran talks
- USD/CAD softens to near 1.4025 in Tuesday’s early European session.
- Fed's hawkish tilt might cap the downside for the pair.
- Oil rises ahead of potential US-Iran talks, supporting the commodity-linked Canadian Dollar.
The USD/CAD pair declines to around 1.4025 during the early European session on Tuesday. Nonetheless, the potential downside for the pair might be limited amid a hawkish stance of the US Federal Reserve (Fed). Fed officials are scheduled to speak later on Tuesday, including John Williams, Philip Jefferson and Thomas Barkin.
Traders are contending with hawkish signals from the US central bank, reinforcing expectations of further tightening later this year. This, in turn, could underpin the US Dollar (USD) against the Canadian Dollar (CAD).
St. Louis Fed President Alberto Musalem said on Monday that the central bank will likely need to hike interest rates further to lower inflation resulting from strong demand as well as a commodity price shock that has moved beyond oil.
Last week, the Fed raised interest rates by a quarter of a percentage point and penciled in an additional hike later this year, steps aimed at containing inflation.
Meanwhile, a rise in crude oil prices could support the commodity-linked Loonie. Iran and the US exchanged threats on Sunday, though US President Donald Trump said he would be open to meeting Iranian President Masoud Pezeshkian, who is expected to be in New York this week for the UN General Assembly, per CNBC.
Uncertainty in the Middle East remains high after Yemen’s Iran-backed Houthis said they attacked Riyadh and a Saudi Aramco facility in Yanbu and stepped up efforts to cut off Saudi-backed forces from the Red Sea coast. 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.
USD strength and wider US-Canada spreads keep CAD on the back foot
Strategists at Scotiabank note that the Canadian Dollar remains under pressure, with “crude oil prices lower on the day also but wider US/Canada front-end spreads are the biggest drag on the currency.” They add that “spot does remain somewhat overvalued relative to our fair value estimate (1.3910),” and caution that, “at the margin, the weaker CAD is unhelpful for the BoC as it considers building inflation risks.”
On the technical side, Scotiabank describes the backdrop as “bullish”—highlighting that “the USD continues to pressure the 50% retracement resistance of the June/August slide in the USD at 1.3990.” They point out that “USD bullish trend momentum on the intraday and daily oscillators supports the positive USD undertone and a sustained push through 1.40 would bolster the outlook for additional gains towards 1.4050/1.4125.” In this context, “support has shifted higher to 1.3940/50,” underscoring the firm tone in USD/CAD.
Technical Analysis: USD/CAD retains a positive bias above the 100-day SMA
In the daily chart, USD/CAD keeps a bullish near-term bias as spot holds above the 100-day moving average (MA) and the Bollinger middle band. The pair is pressing into the upper half of the recent volatility envelope, with the Bollinger upper band just ahead, while the Relative Strength Index (RSI) at 63 suggests firm but not yet overbought upside momentum.
On the topside, initial resistance is located at the Bollinger upper band near 1.4040, where a clear break would open the way for further gains in the short term. On the downside, support is seen first at the 100-day MA around 1.3955, followed by the Bollinger middle band at 1.3891, with the lower band near 1.3740 acting as a deeper structural floor should a broader pullback unfold.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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