Canadian Dollar gains as oil prices rebound
- USD/CAD falls as rising Middle East tensions boost crude oil prices, strengthening the Canadian Dollar.
- WTI rises as Middle East hostilities escalate following drone strikes on Saudi oil facilities and US retaliatory airstrikes in Iraq.
- The US Dollar declines ahead of the Fed policy decision.
USD/CAD extends its losses for the second consecutive day, trading around 1.4090 during the European hours on Wednesday. The pair loses ground as the Canadian Dollar (CAD) gains on higher oil prices, which have rebounded as renewed hostilities in the Middle East reignite geopolitical tensions after several days of relative calm, fueling fresh concerns over potential disruptions to global energy supplies. The escalation began as the US military reported intercepting what it described as a surprise Iranian attack targeting American troops stationed across the Middle East.
Meanwhile, Iran-backed militias in Iraq launched drone strikes against oil facilities in Saudi Arabia’s Eastern Region for a second consecutive day, though the full extent of the damage remains unclear. The incident is believed to be a direct countermeasure against recent US strikes on Iranian naval assets, which triggered immediate retaliation. CENTCOM subsequently executed precision airstrikes in Iraq aimed at neutralizing Iran-backed groups planning further operations against US forces and Saudi energy infrastructure.
The USD/CAD pair also holds losses as the US Dollar (USD) struggles ahead of the Federal Reserve’s (Fed) upcoming policy decision. While the Fed is widely expected to leave interest rates unchanged, traders are currently pricing in an unusually high 30.5% chance of an immediate rate hike, signaling notable uncertainty ahead of the announcement. Looking further ahead, markets are factoring in a 76.6% probability of a rate increase in September, reinforcing expectations that global borrowing costs will remain elevated for longer.
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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