Canadian Dollar gains ground amid rising oil prices
- Canadian Dollar receives support amid higher oil prices driven by US-Iran tensions over the Strait of Hormuz.
- Washington plans maximum economic pressure on Iran to avoid large-scale military conflict and force negotiations.
- The US Dollar may find underlying support as Treasury yields resume their upward trend despite bond buyback plans.
USD/CAD extends its losses for the third successive day, trading around 1.3770 during the Asian hours on Friday. The currency pair loses ground as the commodity-linked Canadian Dollar (CAD) receives support from rising crude oil prices.
Oil prices have surged due to escalating tensions between the United States (US) and Iran, which remain locked in a standoff over control of the crucial Strait of Hormuz. In response, Washington is moving to severely restrict Iran's economy in an initiative President Donald Trump labeled an "economic D-day," with formal details expected on Monday.
The US proposed measures aim to sever Tehran's access to global commercial and financial networks, targeting banks, businesses, shipping registries, cash transfers, and smuggling operations, in an effort to force the regime into negotiations regarding its nuclear program, regional conflicts, and the passage through Hormuz.
According to a CNBC report, US Treasury Secretary Scott Bessent noted that the administration's campaign to dismantle Iran's economic lifelines will likely eliminate the need for significant military intervention. Bessent stated that applying maximum economic pressure makes a large-scale kinetic escalation far less probable.
CAD outperforms as broad Dollar softness and US-Canada trade progress support
Strategists at Scotiabank note that the Canadian Dollar is benefiting from a combination of "broad dollar weakness and signs of progress on US/Canada trade" that are "combining to drive the CAD higher." They point out that intraday gains remain relatively contained, but emphasize that the currency’s "0.3% rise is second only to the NZD among the major currencies," underscoring the Loonie’s firm tone in the current session.
Despite these downward pressures on USD/CAD, the pair's losses could be limited by underlying strength in the US Dollar (USD). Although the US Treasury attempted to control elevated yields through a long-end bond buyback program, US Treasury yields have resumed their upward movement, providing a solid floor for the Greenback. This comes alongside Bessent’s comments indicating that accelerated debt buybacks could surpass the planned $4 billion per issue and that an upcoming fiscal plan is in development, with the US budget deficit expected to have peaked under President Trump.
Dollar slides to mid-June lows as Treasuries underperform
Strategists at Scotiabank highlight that the USD is "weakening further, sliding to its lowest since midJune," with broader market price action mixed across asset classes. They note that "stocks are mixed, crude oil prices are stronger, and major bond markets are a little weaker," while "Treasuries are underperforming and the curve is steepening again," underscoring the pressure on the Dollar as US rates move higher at the long end.
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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