Canadian Dollar gains ground as Middle East tensions boost oil prices
- USD/CAD softens to near 1.3770 in Wednesday’s early European session.
- Renewed Middle East tensions boost crude oil prices, supporting the commodity-linked Loonie.
- Traders await the key US inflation data this week for more clues about the Fed's interest rate trajectory.
The USD/CAD pair declines to around 1.3770 during the early European session on Wednesday. Reports of a US strike on Iranian tankers and attacks on Saudi infrastructure boost crude oil prices and lift the commodity-linked Canadian Dollar (CAD). Traders will closely monitor the key US inflation reports later this week for more clues about the US interest rate path.
CNBC reported on Tuesday that the US struck multiple Iranian oil tankers that officials say are linked to Iran’s Islamic Revolutionary Guard Corps (IRGC). The strikes were a response to attempted missile attacks on a US warship.
Additionally, Iran-backed Houthi militants said they again targeted Saudi Arabia’s 400,000 barrel-a-day Jazan refinery and facilities that serve the domestic market.
It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
The US Producer Price Index (PPI) and Consumer Price Index (CPI) inflation data will be the highlights later this week. These reports could offer some hints about the US interest rate path. Hotter-than-expected inflation readings could reinforce a Federal Reserve (Fed) interest rate hike at the September policy meeting, helping limit the Greenback’s losses.
Geopolitical tensions keep oil and gold risk premium supporting the Canadian Dollar
Strategists at National Bank of Canada note that renewed geopolitical strains are reinforcing the recent support for the Canadian Dollar. They point out that “with tensions flaring up again in the Strait of Hormuz in August, market-implied odds of a return to normal by year-end have fallen below 30%, from more than 50% previously.” According to the bank, this shift “keeps a geopolitical risk premium embedded in both oil and gold, providing support for the Canadian dollar.”
Technical Analysis: USD/CAD maintains a negative outlook under the 100-day SMA
In the daily chart, USD/CAD extends a corrective pullback and holding below a dense band of moving-average and Bollinger resistance. The pair remains capped beneath the 20-day Bollinger middle band and the 100-day simple moving average, with the upper Bollinger band reinforcing the topside ceiling. The Relative Strength Index (14) around 38 stays in bearish territory, hinting that downside pressure persists despite the recent stabilization off intraday lows.
On the downside, initial support aligns with the lower Bollinger band near 1.3750; a clear break below this floor would expose deeper weakness toward prior swing areas not shown by the current indicators. On the topside, a recovery above the 20-day Bollinger midpoint at 1.3842 would be the first sign of easing pressure, while the 100-day SMA at 1.3925 and the upper band at 1.3935 form a tight resistance cluster that must be reclaimed to shift the near-term bias away from bearish.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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