USD/CAD holds gains above 1.3700 due to escalating Israel-Iran conflict
- USD/CAD appreciates as the US Dollar receives support from increased risk aversion.
- The weakening of the commodity-linked CAD could be restrained amid higher crude Oil prices.
- WTI price hits five-month highs as supply concerns heighten after Israel attacked Iran’s Arak heavy water reactor.
USD/CAD continues to gain ground for the third consecutive day, trading around 1.3710 during the European hours on Thursday. The pair gains ground as the US Dollar (USD) draws upward support from increased safe-haven demand, driven by escalating geopolitical tensions in the Middle East.
US President Donald Trump criticized Iran, stating that they “made a mistake”, responding to the Supreme Leader Ayatollah Ali Khamenei’s declaration that “the Iranian nation will not surrender” and warned of “irreparable damage” if the United States (US) directly joins the Israel-Iran conflict.
The US Dollar Index (DXY), which measures the value of the Greenback against six major currencies, is trading higher at around 99.10 at the time of writing. The US Dollar receives support from the cautious remarks from the Federal Reserve (Fed) Chair Jerome Powell, who signaled, in a post-meeting press conference on Wednesday, that inflation remains somewhat above goal and could rise in the future. Powell highlighted the importance of the current policy stance that leaves the central bank well-positioned. He cautioned that ongoing policy uncertainty will keep the Fed in a rate-hold stance.
Fed announced the decision to keep the policy rate steady at the 4.25%–4.50% range at its June meeting, as widely expected. However, the Federal Open Market Committee (FOMC) still sees around 50 basis points of interest rate cuts through the end of 2025.
The upside of the USD/CAD pair could be restrained as the commodity-linked CAD could receive support from the higher crude Oil prices. This is important to note that Canada is the largest crude exporter to the United States, the world’s largest Oil consumer.
West Texas Intermediate (WTI) Oil price appreciates more than 1%, trading around $73.90 per barrel and hitting fresh five-month highs. Crude Oil prices rise due to renewed concerns over supply disruptions after reports that Israel struck Iran’s Arak heavy water reactor early Thursday.
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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