Canadian Dollar regains lost ground as hostilities in Iran boost Oil prices
- USD/CAD dips to the 1.3970 area after being capped just below 1.4000 on Monday.
- Fresh hostilities in Iran have sent Oil prices higher, providing a fresh boost to the CAD.
- US Dollar rallies remain limited with markets awaiting the outcome of the US midterm elections.
The Canadian Dollar (CAD) is taking back some losses against the US Dollar (USD) on Tuesday, favoured by a moderate rebound in Crude prices, as the US resumed hostilities in Iran. The USD/CAD pair has dropped to the 1.3970 area from session highs just below 1.4000, but it is still trading within Monday’s range, with the seven-week low of 1.3941 at a certain distance.
Crude prices have bounced up on Tuesday, providing some support to the Loonie, as Crude is Canada’s main export. The barrel of Brent Oil appreciated about 2.8%, to levels beyond $106.00 on Tuesday, following news reporting that the US military launched “defensive” strikes in the Iranian island of Qeshm, which cast serious doubts on the fate of the latest attempts to resume peace negotiations.
Oil prices are likely to remain higher for longer, analysts say
Looking forward, TD Securities’ analysts see Brent crude in a “higher for longer” pricing regime, with “medium-term fair value for Brent crude oil in the $90-100/bbl region after the eventual conclusion of the conflict in the Middle East.” TD Securities argues that the market will need “one to two years of surpluses to rebuild inventories and buffers to required levels.” This will keep Oil prices elevated and keep a floor on the commodity-sensitive Canadian Dollar.
In the US, data released on Monday revealed that factory activity accelerated beyond expectations in October, according to the US ISM Manufacturing Purchasing Managers' Index (PMI) release. This highlights strong domestic demand and reinforces the view of US economic exceptionalism.
The US Dollar, however, has failed to draw any significant support from the data, as investors remain attentive to the outcome of the US midterm elections taking place on Tuesday. Opinion polls point to a Democrat victory in Congress and a close race for the US Senate.
In Canada, the main focus on Tuesday will be on the Bank of Canada’s (BoC) Governor Tiff Macklem’s speech. The BoC hiked interest rates last week and hinted at further hikes to come, and investors will be eager to know more about the timing and the scope of the bank’s tightening cycle.
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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