Canadian Dollar hits fresh monthly highs amid high Oil prices and a softer US Dollar
- USD/CAD falls to monthly lows below 1.4050, nearly 1.8% below last week's highs.
- The Canadian Dollar rallies as Brent Crude prices hit five-month highs.
- The US Dollar remains on the defensive with investors bracing for a Fed pause next week.
The Canadian Dollar (CAD) extends gains for the fourth consecutive day on Tuesday as Oil prices rally to their highest level since May and the US Dollar (USD) struggles amid dwindling hopes of immediate Federal Reserve (Fed) rate hikes. The USD/CAD pair has extended losses below 1.4050 and is nearly 1.8% down from last week’s highs.
Crude Oil’s rally has provided additional support to the Canadian Dollar this week. US President Donald Trump's decision to waive sanctions on Russia has failed to provide the desired relief in Crude markets, as attacks on vessels attempting to cross the Strait of Hormuz increase, adding strain on supplies from Gulf countries.
Iran announces attacks on two vessels in Hormuz
Iran’s Revolutionary Guards Navy announced earlier on Tuesday to the local Tasnim News agency that two tankers were set ablaze by mines and brought to a halt in the south of the Strait of Hormuz.
The Islamic Republic has recently escalated its rhetoric against the United States and Israel, warning the allies against renewing attacks on Iran and threatening a complete closure in the Strait of Hormuz and additional blockades in the Strait of Bab el-Mandeb abd the Suez Canal.
Middle East tensions sour investors’ appetite for risk but keep buoying the Canadian Dollar, as Oil is Canada's main export and these prices grant a significant increase in Canada’s foreign revenues.
The US Dollar, on the contrary, remains on its back foot, as markets come to terms with the fact that the Federal Reserve (Fed) will not hike interest rates next week. Futures markets are pricing in a more than 80% chance that the Fed will stand pat at the October 28-29 monetary policy meeting, from less than 50% one month ago, according to data by the FedWatch Tool.
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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