Canadian Dollar declines as oil prices ease
- USD/CAD rises as falling oil prices weaken the commodity-dependent Canadian Dollar.
- CENTCOM has lifted all maritime restrictions on traffic traveling to and from Iranian ports and coastal waters.
- A hawkish Fed pause saw nearly half of the officials signaling another rate hike later this year.
USD/CAD rises for the third consecutive day, trading around 1.4140 during the Asian hours on Friday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) struggles amid lower oil prices. Canada is a major net exporter of crude oil, primarily sending its supply to the United States (US). Lower oil prices weigh on Canada's export revenues, which fundamentally pressure the CAD down.
West Texas Intermediate (WTI) oil price edges lower, slipping to around $75.10 per barrel at the time of writing and reversing the modest gains recorded in the previous session. The US oil benchmark is now on track to lock in a steep weekly loss of roughly 9.5% as energy investors react to rapidly improving shipping conditions in the Strait of Hormuz after US President Donald Trump signed a deal with Iran to end the war.
The US and Iran signed an initial agreement, kicking off 60 days of negotiations on a final deal to end the war, per CNN. Additionally, the US military earlier confirmed it had ended its blockade on Iranian ports near the Strait of Hormuz, as officials claim millions of barrels are once again flowing through the vital waterway. Positive developments surrounding the US-Iran peace deal could boost riskier assets, such as the shared currency, in the near term.
The Federal Open Market Committee (FOMC) voted unanimously on Wednesday to hold its benchmark overnight borrowing rate steady at a range of 3.5%–3.75%. However, the decision carried a hawkish tone, with nearly half of the officials signaling that at least one rate hike could be required later this year.
This hawkish pause by the central bank could bolster the US Dollar (USD) and provide a tailwind for the USD/CAD pair. In his debut press conference, newly appointed Federal Reserve (Fed) Chairman Kevin Warsh emphasized that "price stability" remains the Fed's ultimate guiding principle.
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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