Canadian Dollar struggles as oil prices ease, USD remains firm
- USD/CAD appreciates as the commodity-linked Canadian Dollar faces challenges due to a slight decline in oil prices.
- WTI may regain ground as Trump threatened to attack Iran within days to force a war-ending deal.
- The US 30-Year Treasury Yield declines to 5.180% after hitting a near 19-year high of 5.200% on Wednesday.
USD/CAD remains stronger for the second successive day, trading around 1.3760 during the Asian hours on Wednesday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) faces challenges due to a slight decline in oil prices. Canada is one of the world's largest oil producers and exporters, sending the vast majority of its supply to the United States (US). Changes in oil prices impact Canada's export revenues and terms of trade.
West Texas Intermediate (WTI) oil price halts its four-day winning streak, trading around $102.80 per barrel at the time of writing. However, crude oil prices may regain their ground due to US President Donald Trump’s renewed threat to resume military strikes on Iran within two or three days to force a deal ending the war, following a brief pause after a new proposal from Tehran. In response, an Iranian official asserted that the US threat of a massive assault would be met resolutely, stating that Iran is fully prepared to confront any military aggression.
Statistics Canada reported on Tuesday that the annual inflation rate accelerated to 2.8% in April from 2.4% in March, largely driven by higher gasoline prices. Despite the pickup, the reading came in below market forecasts of 3.1%. On a monthly basis, headline inflation rose by 0.4%, slowing down from the 0.9% increase seen in the previous month. Meanwhile, preferred measures of core inflation cooled, supporting the Bank of Canada’s (BoC) view that energy-driven price pressures may eventually fade, and easing broader market concerns over further domestic interest rate hikes.
The USD/CAD pair appreciates as the US Dollar (USD) receives support from safe-haven flows. This increase in risk aversion followed fresh threats from US President Donald Trump regarding potential military strikes on Iran. US inflation risks are also rising due to these war-driven energy price pressures, with earlier spikes in oil reinforcing expectations that the Federal Reserve may need to maintain higher interest rates for longer or even tighten policy further. Additionally, a sharp increase in Treasury yields reflects renewed market concerns that inflation could remain elevated for longer than previously anticipated.
In the fixed-income market, the US 30-Year Treasury Yield inched lower to 5.180% at the time of writing, after reaching a nearly 19-year high of 5.200% on Wednesday. In contrast, shorter-term yields maintained their upward momentum. The 10-Year Treasury Yield remained stronger near its 16-month high of 4.687%, and the 2-year yield held close to its 15-month high of 4.139%, with both of those peaks having been recorded during Tuesday's session.
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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