Canadian Dollar rises as US Dollar declines on fading safe-haven demand
- USD/CAD declines as the US Dollar loses ground following reports of a US-Iran peace deal to reopen the Strait of Hormuz.
- The CAD faces pressure as WTI oil falls after Trump announced an agreement making the Strait of Hormuz "permanently toll-free."
- Iran stated final talks depend on US compliance, demanding an immediate and complete end to the maritime blockade.
USD/CAD depreciates after two days of gains, trading around 1.3970 during the Asian hours on Monday. The currency pair is under downward pressure as the US Dollar declines broadly, driven by a sharp reduction in market risk aversion. This shift follows major geopolitical breakthroughs indicating that the United States and Iran have agreed on a comprehensive peace deal to end their nearly four-month conflict and fully reopen the strategic Strait of Hormuz.
However, the downside for the USD/CAD pair could be limited because the commodity-linked Canadian Dollar (CAD) may face its own headwinds. As Canada is the largest crude exporter to the US, the CAD is highly sensitive to oil prices, which have plummeted significantly on the back of the de-escalation.
West Texas Intermediate (WTI) crude fell over 4%, trading near $79.60 per barrel following reports from *The New York Times* that US President Trump announced the agreement would ensure the Strait of Hormuz remains "permanently toll-free."
The geopolitical shift gained traction after Bloomberg reported Pakistan Prime Minister Shehbaz Sharif's confirmation that both nations had agreed to an immediate and permanent termination of military operations on all fronts, including Lebanon.
While Iran's National Security Council confirmed the ceasefire, Iranian officials noted that final talks will only commence once the US fulfills its commitments under the memorandum of understanding, emphasizing that the maritime blockade against Iran must end immediately and entirely.
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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