Canadian Dollar gains ground on surging Oil, rising BoC hike bets
- USD/CAD softens to around 1.4165 in Thursday’s Asian session.
- US and Iran trade strikes for second day after Trump said ceasefire is ‘over.’
- Traders raised bets on a BoC interest rate hike this year.
The USD/CAD pair loses ground to near 1.4165 during the Asian trading hours on Thursday. A rise in crude oil prices provides some support to the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Traders await the US weekly Initial Jobless Claims report later on Thursday.
Axios reported that the US strikes hit a rail line in Golestan province in northeastern Iran, near the border, using cruise missiles. It marked the first US strike on Iranian infrastructure since the ceasefire took hold. Iran said multiple US artillery shells struck a railway bridge west of Aghala in Golestan early Thursday, triggering several explosions.
Earlier, US President Donald Trump said an interim agreement to end the war with Iran was “over.” Iranian Parliament speaker Mohammad Bagher Ghalibaf warned Washington that any U.S. military action will prompt retaliation. 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 CAD has performed relatively well through the overnight volatility," Shaun Osborne and Eric Theoret, strategists at Scotiabank, said in a note. "Negative CAD sentiment is moderating but spot remains quite elevated."
The Bank of Canada (BoC) decided to hold its benchmark overnight interest rate at 2.25% at its June policy meeting, marking its fifth consecutive rate hold. Traders see a roughly 60% odds the BoC will raise interest rates this year, up from 40% on Tuesday, swap market data showed.
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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