USD/CAD holds gains above 1.3650 ahead of ISM Manufacturing PMI
- USD/CAD gains as the US Dollar strengthens on safe-haven demand amid escalating Middle East tensions.
- CAD may gain support as WTI holds firm after Iran’s IRGC Navy halted shipments through the Strait of Hormuz.
- Israeli forces struck Hezbollah-held areas in Beirut after missiles were fired from Lebanon, prompting evacuation orders for nearby towns.
USD/CAD gains ground after registering modest losses in the previous session, trading around 1.3660 during the Asian hours on Monday. The pair appreciates as the US Dollar (USD) rises on increased safe-haven demand amid escalating Middle East tensions. Traders await the ISM Manufacturing Purchasing Managers’ Index (PMI) due later in the day.
However, the upside of the USD/CAD pair could be restrained as the Canadian Dollar (CAD) could receive support from higher Oil prices, given Canada’s status as the largest Oil exporter to the United States (US).
West Texas Intermediate (WTI) Oil experiences volatility, trading around $71.50 at the time of writing. WTI price opened at a gap up on Monday as the Iranian Islamic Revolutionary Guard Corps (IRGC) Navy announced the stoppage of shipments through the Strait of Hormuz. More than 20% of global Oil is moved through the Strait of Hormuz. Iran is the fourth-largest producer in OPEC.
Israel launched heavy strikes on Beirut after Hezbollah fired missiles across the border early Monday, following coordinated US-Israel attacks on Iran over the weekend that reportedly killed Iran’s Supreme Leader Ayatollah Ali Khamenei. The Israeli military also issued evacuation orders for several Lebanese towns.
US President Donald Trump said hundreds of targets were hit, including Revolutionary Guard facilities, air defense systems, nine vessels, and naval infrastructure. He added that military operations will continue until all objectives are achieved.
Federal Reserve (Fed) Governor Mi Lan called for significant interest rate cuts as soon as possible, arguing that underlying price pressures remain subdued and that persistently high rates reflect distortions in inflation measurement.
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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