Canadian Dollar gains ground as easing safe-haven demand weighs on US Dollar
- USD/CAD weakens as the US Dollar softens amid optimism over a potential Tehran deal.
- Defense Secretary Pete Hegseth said the US-Iran ceasefire holds despite Gulf clashes over the Strait of Hormuz.
- The commodity-linked CAD may weaken as oil prices fall amid easing supply concerns on fading Middle East tensions.
USD/CAD extends its losses for the second successive day, trading around 1.3600 during the Asian hours on Wednesday. The pair retreats as the US Dollar (USD) softens on reduced safe-haven demand, driven by rising optimism over a potential deal with Tehran.
Washington announced an end to offensive operations against Iran and reaffirmed the ceasefire, with US Secretary of State Marco Rubio stating that “Operation Epic Fury is concluded,” adding that its objectives had been achieved.
However, US Defense Secretary Pete Hegseth said on Tuesday that the ceasefire with Iran was not fully settled, as both sides continued exchanging fire in the Gulf amid tensions over control of the Strait of Hormuz.
Losses in the USD/CAD pair may be capped, as the commodity-linked Canadian Dollar (CAD) may face pressure from weaker oil prices. West Texas Intermediate continues to decline, trading near $97.90 per troy ounce at the time of writing.
Oil prices are falling as supply concerns ease alongside fading Middle East tensions. US President Donald Trump stated that the US would temporarily pause efforts to help stranded vessels exit the Strait of Hormuz, allowing time to evaluate prospects for a deal with Iran to end the conflict.
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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