Canadian Dollar weakens as oil prices ease
- USD/CAD appreciates as lower oil prices weigh on the commodity-linked Canadian Dollar.
- Oil prices may regain their ground as Iran halts indirect negotiations with the United States.
- US Dollar gains as renewed Middle East tensions fuel inflation fears and expectations of elevated Federal Reserve interest rates.
USD/CAD extends its gains for the third successive day, trading around 1.3840 during the Asian hours on Tuesday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) struggles on lower oil prices. However, Crude oil prices may regain their ground as Tasnim news agency indicated that Tehran has halted indirect negotiations with the United States.
According to the report, Iran and its "Resistance Front" allies, spanning Yemen, Lebanon, and Iraq, have established an agenda to completely block the critical Strait of Hormuz and activate additional fronts, including the Bab el-Mandeb Strait, as a means to punish Israel and its supporters.
Renewed tensions in the Middle East continue to fuel global inflation concerns and stoke expectations of elevated Federal Reserve policy rates. This macroeconomic backdrop is providing strong support to the US Dollar (USD), subsequently keeping the USD/CAD pair higher.
Reflecting these persistent inflationary pressures, financial markets are now pricing in a potential Federal Reserve (Fed) rate hike before the year ends, with the CME FedWatch tool currently indicating a 39% probability of a quarter-point increase in December.
However, US President Donald Trump offered a more optimistic diplomatic outlook, announcing that an agreement with Iran to extend the ceasefire and reopen the critical Strait of Hormuz could be reached "over the next week."
Trump’s comments followed his direct intervention to halt a sudden military flare-up between Israeli forces and Hezbollah in Lebanon. While acknowledging that several unresolved details remain on the table, Trump expressed confidence in the ongoing negotiations, noting that he had already swiftly resolved a diplomatic "glitch" that previously threatened to derail progress.
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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