Canadian Dollar gains support from rising Oil prices as USD/CAD trims intraday gains
- USD/CAD reverses earlier gains as rising Oil prices support the commodity-linked Canadian Dollar.
- Ongoing uncertainty around US-Iran negotiations keeps the US Dollar broadly supported.
- Markets continue to monitor geopolitical headlines and global inflation risks linked to higher Energy prices.
USD/CAD reverses earlier intraday gains on Tuesday, with the Canadian Dollar (CAD) drawing support from rising Oil prices and offsetting broader US Dollar (USD) strength. At the time of writing, the pair is trading around 1.3800 after hitting an intraday high near 1.3821 earlier in the day.
Ongoing uncertainty surrounding US-Iran negotiations continues to support demand for the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.16 after briefly slipping below the 99.00 mark on Monday.
Hopes for an immediate agreement faded after American forces carried out “defensive strikes” in southern Iran on Monday, targeting missile facilities and Iranian boats allegedly attempting to deploy naval mines near the Strait of Hormuz.
Although diplomatic efforts between Washington and Tehran remain ongoing, major differences reportedly persist over Iran’s nuclear program, sanctions relief, the release of frozen Iranian assets and the US naval blockade on Iranian ports.
Iran’s Tasnim News Agency, citing a source close to the negotiation team, reported that Tehran wants the United States (US) to release $24 billion in frozen Iranian funds as part of a potential deal. Iran is also seeking at least half of that amount to be released immediately after the agreement is announced.
Meanwhile, The Wall Street Journal reported that the US Navy has resumed guiding commercial ships through the Strait of Hormuz as tensions in the region remain elevated.
Continued disruption risks surrounding the Strait of Hormuz have kept global Oil prices elevated, providing underlying support to the commodity-linked Canadian Dollar, given Canada’s status as one of the world’s largest crude exporters. West Texas Intermediate (WTI) crude is up nearly 4% on the day, trading around $93 at the time of writing.
At the same time, rising Oil prices continue to fuel inflation concerns globally, reinforcing expectations that major central banks, including the Federal Reserve (Fed) and the Bank of Canada (BoC), may need to raise interest rates.
BoC Deputy Governor Nicolas Vincent said on Tuesday that “the more the economy faces shocks accompanied by structural change, the less clear-cut our monetary policy decisions will be.”
On the data front, US CB Consumer Confidence came in at 93.1 in May, down from 93.8 in April. Traders now await the US Personal Consumption Expenditures (PCE) inflation report on Thursday, followed by Canada’s Gross Domestic Product (GDP) data on Friday.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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