Canadian Dollar holds gains despite lower oil prices
- USD/CAD declines as the US Dollar weakens amid easing Middle East tensions and improving market sentiment.
- Israel and Iran signaled easing hostilities, while Trump said the US-Iran ceasefire remains in place.
- The commodity-linked CAD may also weaken amid lower oil prices.
USD/CAD depreciates after two days of gains, trading around 1.3660 during the Asian hours on Friday. The pair weakens as the US Dollar (USD) softens amid improving market sentiment driven by the de-escalation of renewed tensions in the Middle East. Separate statements from Israel and Iran suggested that hostilities have, for the time being, subsided. US President Donald Trump also stated that the ceasefire between the US and Iran remains intact.
However, losses in the USD/CAD pair may remain limited as the commodity-sensitive Canadian Dollar (CAD) could also come under pressure due to declining oil prices. It is important to note that Canada is the largest crude oil exporter to the United States (US).
West Texas Intermediate (WTI) crude prices retreat after posting modest gains in the previous session, trading near $92.70 per barrel at the time of writing. Crude oil prices moved lower as easing tensions between the US and Iran reduced concerns over potential supply disruptions.
Oil prices had earlier advanced after renewed tensions flared between the United States (US) and Iran. The US military said it conducted retaliatory strikes on Iranian targets on Thursday, focusing on sites allegedly linked to attacks against US forces.
The Canadian Dollar also remained under pressure amid expectations of a dovish stance from the Bank of Canada (BoC). The latest GDP figures pointed to an economic slowdown following the outbreak of the conflict, reinforcing the BoC’s cautious guidance as policymakers continue prioritizing economic growth while inflation pressures remain contained.
Traders now await Canadian employment data due on Friday. Economists expect Canada to add 15,000 jobs in April, while the unemployment rate is projected to remain steady at 6.7%.
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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